north macedonia 2021 erp assessment
TRANSCRIPT
8099/21 SV/sl
ECOMP 1A EN
Council of the European Union
Brussels, 26 April 2021 (OR. en) 8099/21 ECOFIN 369 UEM 82 COWEB 46
COVER NOTE
From: Secretary-General of the European Commission, signed by Ms Martine DEPREZ, Director
date of receipt: 22 April 2021
To: Mr Jeppe TRANHOLM-MIKKELSEN, Secretary-General of the Council of the European Union
No. Cion doc.: SWD(2021) 95 final
Subject: Commission staff working document - Economic reform programme of the Republic of North Macedonia (2021-2023) - Commission assessment
Delegations will find attached document SWD(2021) 95 final.
Encl.: SWD(2021) 95 final
EN EN
EUROPEAN COMMISSION
Brussels, 22.4.2021
SWD(2021) 95 final
COMMISSION STAFF WORKING DOCUMENT
ECONOMIC REFORM PROGRAMME
OF
NORTH MACEDONIA
(2021-2023)
COMMISSION ASSESSMENT
Page 1 of 48
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY .................................................................................................. 2
2. ECONOMIC OUTLOOK AND RISKS ................................................................................. 4
3. PUBLIC FINANCE ........................................................................................................... 8
4. KEY STRUCTURAL CHALLENGES AND REFORM PRIORITIES ..................................... 14
5. OVERVIEW OF THE IMPLEMENTATION OF THE POLICY GUIDANCE ADOPTED AT
THE ECONOMIC AND FINANCIAL DIALOGUE IN 2020 ................................................. 26
6. ASSESSMENT OF THE OTHER AREA/SECTOR AND STRUCTURAL REFORM MEASURES
INCLUDED IN THE 2020-2022 ERP ............................................................................. 30
ANNEX A: OVERVIEW OF THE MAIN INDICATORS PER AREA/SECTOR OF THE
ECONOMY ................................................................................................................... 42
ANNEX B: PROGRESS WITH STRUCTURAL REFORM MEASURES FROM 2019-2021
ERP ............................................................................................................................ 45
ANNEX C: COMPLIANCE WITH PROGRAMME REQUIREMENTS ..................................... 46
REFERENCES ................................................................................................................... 48
Page 2 of 48
1. EXECUTIVE SUMMARY
In 2020, the accelerating economic growth of the Republic of North Macedonia and
positive outlook were brought to an abrupt halt by the COVID-19 pandemic. The
number of cases increased rapidly. Wide-ranging containment measures, including shop
closures and curfews, dampened domestic demand. The external sector was hit by lower
foreign demand due to both, the global recession and supply chain disruptions affecting the
production of automotive components. As a result, real GDP dropped by 4.5% y-o-y in 2020.
Only public consumption contributed positively to growth, fuelled by government purchases
to cover the needs of the health sector, and to implement sizeable and well-targeted measures
from four successive support packages.
The Economic Reform Programme (ERP) expects a strong rebound in economic activity
starting in 2021. The programme anticipates a gradual retreat of the pandemic in 2021 and
the lifting of containment measures. Based on these expectations, the programme is rather
optimistic: it projects growth to accelerate from 4.1% to 5.2% over 2021-2023, driven by
household spending and investment, including a strong contribution from public investment.
The COVID-19 crisis left a deep mark on public finances in 2020. The fiscal deficit almost
quadrupled, rising to 8.2% of GDP. This was due to the twin effects of foregone tax revenue
from the decline in economic activity, and additional expenditure on anti-crisis measures to
support households and companies. The programme expects a gradual recovery of public
finances, driven by the projected strong growth in output and the phasing out of current
support measures. The fiscal deficit is expected to narrow starting in 2021, but to remain
above its pre-crisis level over the programme’s horizon. Because of significant external
funding to bridge the government’s crisis-induced financing gap in 2020, the general-
government debt level has increased sharply, rising to over 51% of GDP. It is projected to
continue rising until 2023, partly in anticipation of increased lending to public enterprises to
implement the government’s public-investment agenda.
The main challenges facing North Macedonia are the following:
• Transparent and targeted fiscal-policy support is still needed amid the current
uncertainties. However, once the recovery takes hold, public finances must recover and
return to sustainable levels. This implies moving towards a balanced primary budget,
underpinned by: (i) improvements in tax collection; (ii) a broadening of the tax base; and (iii)
strengthened fiscal governance bolstered by fiscal rules and an independent fiscal council.
• North Macedonia’s poor implementation record of budgeted capital expenditure and
its planned increase in capital spending show the need for significant improvements in
the management of public investment. These improvements should be based on the
approved action plan. A new legal framework for public-private partnerships could facilitate
public infrastructure projects.
• The allocation of state support to companies remains opaque, which makes it
difficult for aid to be well-targeted and efficient. The transparency of company-level
subsidies could be much improved by setting up a State-aid registry.
• Domestic companies suffer from low levels of productivity. Productivity growth is
also very slow. This hinders companies’ competitiveness and integration in the global
economy. The COVID-19 pandemic has put significant additional burdens on companies,
causing them to reduce their investment in development of human and physical capital. At the
same time, the crisis has revealed vulnerabilities in global value chains, which also affected
North Macedonia’s companies. Improving the competitiveness of local companies and
benefiting from the post-COVID-19 restructuring of global value chains will require
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improvements to human and physical capital and the business environment, including better
enforcement of business regulation and corporate governance, as well as better services
including trade and transport logistics. Greater investment in research and innovation, as well
as further regional integration, could further support competitiveness.
• The size of the informal sector continues to be a challenge for the business
environment as it creates unfair competition from unregistered companies. Undeclared
revenues and employment also harm public revenue collection, which will be particularly
important for the post COVID-19 recovery. Undeclared revenues and employment also
reduce levels of formal employment and its associated benefits, including job security and
safety at work. Due to its complex character, reducing the size of the informal sector will
require a coordinated approach across the whole of government. This approach will need
high-level political steer to include all the stakeholders and measures relevant for reducing
informality.
• The education system does not equip young people with enough of the key
competences – skills and knowledge – that they need to actively participate in the labour
market. While North Macedonia has progressed very well in terms of the number of people
with higher educational attainment, insufficient quality of education and the structure of
enterprises contribute to persistent unemployment and still a high share of young people not
in employment, education or training (NEET). The country’s education strategy and related
action plan prioritise providing skills to young people to prepare them for the labour market.
Nevertheless, state financial support for education is insufficient and coordination between
different sectors (economic sectors and educational sectors) still needs improvement. Students
and families receive limited career guidance information when making important choices and
curricula are not in line with labour market needs.
The policy guidance jointly agreed at the Economic and Financial Dialogue of 19 May
2020 has been partially implemented. Notably, the government adopted four sets of fiscal
measures to mitigate the crisis impact on the economy; it adopted the Tax System Reform
Strategy; it publishes quarterly data on the finances of public enterprises on its website; it
adopted an Action Plan for improving public investment management; and it adopted a new
draft Organic Budget Law, that provides for fiscal rules and the establishment of a fiscal
council. A list containing 377 para-fiscal charges was published. Steps towards their reduction
and abolishment remain to take place. To modernise the education system, the government is
implementing the 2018-2025 education strategy and action plan, which covers the six pillars
of the education system. However, more own budgetary resources and capacities are required
to tackle bottlenecks in implementation. The government also implemented special measures
to protect jobs during the pandemic. The Law on Social Protection was adopted in May 2019
to strengthen the coverage and rights of people at risk of poverty. The guaranteed minimum
assistance (GMA) scheme was implemented. The new Law on Social Protection contained
‘activation’ measures to encourage recipients of the GMA to enter the labour market.
However, these measures are only being partially implemented.
The challenges identified in the ERP largely match those identified by the European
Commission. The planned structural reform measures do not all follow a sufficiently coherent
and focused vision of the objectives and targets for the country’s economic development. The
impact assessment of the structural reform measures could be further improved to allow
prioritisation based on measures’ economic, social and environmental impact. The reform of
the social-protection system contributes to the social inclusion of beneficiaries of the system
who are at risk of poverty. The key policy reforms and specific programs and measures
including indicators and budget in the field of employment, education and social policy are
presented in a strategic document called Employment and Social Reform Programme (ESRP).
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A special Inter-sectoral Working Group coordinated by the Ministry of Labour and Social
Policy has been established in 2016 for the preparation of the ESRP. It is composed of
representatives of all relevant institutions participating in the development, implementation
and monitoring of the policies in the above mentioned areas. The "Revised Employment and
Social Reform Programme ESRP(r) 2020" adopted by the Government in December 2019
sets-out and presents the key policy reforms and specific programs and measures that shall be
implemented in a short and medium term (until 2022).
2. ECONOMIC OUTLOOK AND RISKS
North Macedonia’s economic upswing came to a sudden halt in 2020, as the pandemic
hit domestic and foreign demand. Driven by strengthening domestic demand and foreign
investment, North Macedonia’s economy had been on a path of accelerating growth in the 2
years prior to the crisis. When the pandemic hit the country in March 2020, the government,
reacted swiftly to a rapid rise in the number of COVID-19 cases, with wide-ranging
containment measures. Domestic economic activity plunged in the wake of these measures,
and external trade suffered from lockdowns and recessions in trading-partner economies. In
addition, travel bans greatly reduced turnover in the tourism and transport sectors. As a result,
real GDP in 2020 dropped by 4.5% on average, with the annual decline narrowing
consecutively each quarter since the steep fall in the period between April and June.
Investment spending plummeted in the second quarter of 2020, but recovered over the
summer. Household disposable income suffered from a stark drop in remittances from abroad,
even though the labour market proved resilient throughout the year. In response to the crisis,
the government adopted four sets of measures in 2020 to support households and businesses,
including subsidies, tax deferrals and interest-free loans. Implementation of these measures so
far amounts to some 6.5% of GDP (2020), bolstering employment and wage growth as well as
corporate liquidity.
The ERP expects growth to pick up in 2021 and to average 4.6% in 2021-2023. The
programme projects real GDP to increase by 4.1% in 2021. This is unchanged from the 2021
forecasts made by the programme last year, except that the programme now expects the
negative contribution from the external sector to be bigger, while domestic demand is
expected to make a larger positive contribution. Household spending is expected to increase at
its pre-COVID-19 rate, with growth accelerating in 2021, 2022 and 2023. Investment
spending is also projected to continue growing each year. Due to the high import-dependence
of investment and exports, net exports will make a negative contribution to growth in 2021.
For 2022, the programme assumes real GDP growth of 4.6% (+0.3 pps. compared to the 2022
forecast in last year’s programme). The pre-COVID growth trajectory is forecast to resume in
the second half of 2022, and the ERP projects that the negative output gap will close in 2023,
when growth is forecast to reach 5.2%. The negative contribution of net exports is expected to
gradually diminish each year until 2023. The external assumptions underlying the
government’s projections are in line with consensus and Commission forecasts, indicating a
moderate recovery in foreign demand over the programme’s horizon. The programme, for the
first time, contains projections beyond the three-year horizon. Hence, the government projects
growth to reach 5.9% in 2025, and average year-on-year growth between 2021 and 2025 to
reach 5.3%.
In light of lingering uncertainties, the projections seem overly optimistic. The
macroeconomic and fiscal outlook continue to be affected by great uncertainty about: (i) the
future course of the pandemic; (ii) possible further containment measures; and (iii) the impact
of containment measures on the economy, both in North Macedonia and in its major trading
partners. Domestically, optimistic assumptions about the disposable income of households
and about public and private investment might be disappointed. On the external side, foreign
Page 5 of 48
demand might be lower than expected by the ERP. In addition, new FDI and the extension of
export-production capacities by established foreign companies might turn out to be lower than
projected, given current uncertainties and the ongoing revision of tax benefits for foreign
companies. Propelled by government subsidies and rises in both the minimum wage and
public sector pay, real wage increases have recently been far in excess of the stagnant growth
in productivity. This has eroded North Macedonia’s external competitiveness. However, there
is still room to increase fiscal and monetary support if conditions deteriorate. Nevertheless,
the programme’s baseline scenario seems too optimistic. The implementation of structural
reforms may possibly improve growth components, but the programme does not provide any
information on this. The expected development of growth components also appears to not be
entirely in line with the government’s plans for expenditure-based fiscal consolidation.
The programme presents two alternative macroeconomic scenarios based on identified
risks to the baseline projection. The first scenario assumes lower export growth due to lower
foreign demand, which also leads to lower FDI inflows. As a result, economic growth in 2021
would be lower by 1 pp., and average annual growth in 2021-2025 would be 4%. The second
scenario assumes lower-than-anticipated investment, in particular public investment. Growth
in 2021 under this second scenario would be 3.7%, and average annual growth would be 4.6%
between 2021-2025. Both of these scenarios still seem rather benign.
Consumer prices are expected to rise due to all components. Despite an accommodative
monetary-policy stance, and the cut in the policy rate to a record low of 1.5%, average annual
inflation remained below official projections at 1.1% in 2020. Moderate inflation pressures
arose from food prices and core inflation, while falling energy prices acted in the opposite
direction. In line with assumptions about a global economic recovery and a renewed rise in oil
prices, the programme expects consumer prices to rise over the programme’s horizon, driven
by a gradual increase in foreign inflation. Consumer prices are therefore forecast to increase
by 1.5% in 2021, (which is 0.5 pps. lower than expected in the previous year’s ERP), and
further to around 2% in both 2022 and 2023. The programme considers that risks to the
inflation forecast arise especially from uncertain dynamics in commodity prices, in particular
oil. The programme’s inflation forecast is plausible. As a small, open economy with a de-
facto currency peg, the country’s price level is largely determined by international price
developments. However, the ERP’s presentation might have benefited from a more thorough
analysis of potential pressures from domestic demand, given the expectation that output
growth will perform beyond potential in 2023, and also given the further rise in nominal
wages in 2020.
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External vulnerabilities increased somewhat in 2020, but the outlook is positive.
Extended lockdowns and recessions in trading partner economies left a mark on export
performance in 2020, in particular of intermediate goods from established foreign companies
in automotive supply chains. The merchandise trade deficit in 2020 remained at 16.8% of
GDP, as in the preceding year. Inflows of private transfers from abroad declined, by 1.6 pps.
y-o-y to 13.2% of GDP. Altogether, the current account deficit widened by 0.2 pps. y-o-y to
3.5% of GDP, slightly below the ERP estimate. The shortfall was not covered by net FDI
inflows, which were some 43% lower y-o-y in 2020, on account of significant outflows of
intercompany debt, and amounted to only 1.9% of GDP, compared to 3.2% one year earlier.
The programme expects the current account deficit to gradually narrow to 1.5% of GDP in
2023 due to a smaller goods trade deficit and a return of current transfers to their long-term
average of about 15.3% of GDP in 2023. The primary income balance is expected to worsen,
in terms of GDP, by 1 pp., to 3.8% of GDP between 2020 and 2023.
Government financing requirements drove the sizeable rise in external debt. Foreign
debt rose by markedly more in 2020 than anticipated in the previous year’s programme. This
was the result of foreign financing for crisis-induced additional requirements faced by the
central government, and was complemented by a small rise in external private sector debt
(intercompany loans). External debt (both public and private) amounted to 80.2% of GDP
(+7.3 pps. compared to end-2019, and +3.8 pps. compared to projections in last year’s ERP).
The government also bolstered its foreign exchange reserves, which covered some 4.6
months’ worth of prospective imports at end-2020. The share of intercompany debt and trade
credits, which constitute less volatile components of foreign debt, remained high and
unchanged compared to the previous year, at some 40% of total external debt. In 2021, the
programme expects external debt to rise further, mainly due to the public sector (central
government borrowing, but also disbursements of foreign loans to public enterprises carrying
out public investment). Between 2021 and 2023, on a cumulative basis, gross external debt
would rise by 0.4 pps., according to an external debt sustainability analysis presented in the
programme. The private sector would contribute 1 pp. to this rise, while the public sector’s
external debt would drop by 0.6 pps. over this period. Stress-test results presented in this
analysis point to limited vulnerability in the event of shocks to GDP, the primary deficit or
interest rates.
Table 1:
COM ERP COM ERP COM ERP COM ERP COM ERP
Real GDP (% change) 3.6 3.2 -4.9 -4.4 3.8 4.1 3.5 4.6 n.a. 5.2
Contributions:
- Final domestic demand 4.3 5.3 -4.8 -5.8 5.8 5.4 6.2 5.2 n.a. 5.6
- Change in inventories 0.8 n.a. 0.0 n.a. 0.0 n.a. 0.0 n.a. n.a. n.a.
- External balance of goods and services -1.5 -2.1 -0.1 1.3 -2.0 -1.3 -2.8 -0.6 n.a. -0.4
Employment (% change) 5.0 5.1 -0.3 0.4 0.5 1.9 2.4 2.1 n.a. 2.3
Unemployment rate (%) 17.3 17.3 17.3 16.6 17.1 15.8 16.6 15.0 n.a. 14.1
GDP deflator (% change) 2.3 1.1 -0.7 1.0 0.9 2.0 2.1 2.0 n.a. 2.0
CPI inflation (%) 0.8 0.8 0.9 1.1 1.2 1.5 1.5 2.0 n.a. 2.0
Current account balance (% of GDP) -3.3 -3.3 -4.2 -3.7 -3.9 -2.6 -3.8 -1.6 n.a. -1.5
General government balance (% of GDP) -2.1 -2.2 -8.6 -8.4 -4.5 -4.9 -3.2 -3.8 n.a. -3.2
Government gross debt (% of GDP) 40.2 40.6 51.1 51.2 53.2 53.2 53.6 53.3 n.a. 53.7
2023
Sources: Economic Reform Programme (ERP) 2021, Commission Autumn 2020 forecast (COM).
North Macedonia - Comparison of macroeconomic developments and forecasts
2019 2020 2021 2022
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The central bank ensured that banks remained resilient during the crisis. Banks continue
to dominate North Macedonia’s financial sector, accounting for some 82% of sector assets.
Banking sector concentration remains moderate and was almost unchanged compared with
previous years, with some 57% of assets held by the three biggest banks in 2020. Ten out of
the sector’s fourteen banks are predominantly in foreign ownership. In August, the central
bank revoked the license of one (small) bank, which, however, had a very limited impact on
the sector’s performance. The banking system remains well-capitalised, but there is a need to
preserve capital in view of the likely future rise in NPLs, following regulatory normalization.
The share of own funds allowed to serve as buffers remains high overall in the sector. Capital
adequacy (Tier-1 capital to risk weighted assets), rising to some 15.5% at the end of 2020,
compared to a year earlier (14.7%). The programme said that capital adequacy remains above
regulatory requirements even in extreme stress simulations. Supported by central bank action,
banks hold abundant liquid assets (in March, the central bank lowered reserve requirements
for loans to the most affected sectors, and in May it expanded the range of securities accepted
from banks as collateral in liquidity-increasing operations). The loan-to-deposit ratio
increased only marginally in 2020 compared to a year earlier. Despite two temporary periods
in which deposits declined, deposit growth remained strong in 2020 overall, with a (crisis-
induced) preference among savers for more short-term, liquid, and, to some extent foreign
exchange-denominated deposits. Importantly, it is essential that the independence of the
central bank is maintained, combined with accountability and transparency, so it can continue
to fulfil its mandate of maintaining price stability and the overall stability of the financial
system.
Regulatory easing bolstered bank lending, but asset deterioration is expected when
measures are phased out. In March, the central bank allowed commercial banks to
temporarily ease credit standards, including through two payment moratoria allowing for the
temporary deferral of loan repayments. The first moratorium, running from April to
September 2020, was taken up by about half of the household loan portfolio, and by about one
third of companies. Also, banks could raise the threshold for loans to reach non-performing
status (from 90 to 150 days). These measures helped strengthen credit growth and contain the
non-performing loan (NPL) ratio: at the end of 2020, the NPL ratio fell to 3.4%. Credit
growth to the non-governmental sector amounted to 6.5% in 2020 (2019: 7.3%). After the end
of the second moratorium in the spring (for households in March, staggered for companies as
of May), and accounting for the 90 days grace period, a rise in the NPL ratio is to be
expected. Given the likely increased needs for provisioning after the end of the moratorium,
some banks may need to strengthen their capital buffers. The phasing out of regulatory easing
also requires a legal framework to be put in place, to deal with a potential deterioration in
asset quality. For example, this legal framework could facilitate the transformation and sale of
NPLs. In this regard, a swift adoption of the draft Law on bank resolution will be important.
Graphs: external competitiveness and current accout
100
101
102
103
104
105
2016 2017 2018 2019 2020
North Macedonia - Real effective exchange rate,
(CPI based, total economy, 2010=100)
Source: Economic Reform Programme (ERP) 2021, Central Bank
Appreciation
Depreciation-6
-4
-2
0
2
4
-20
-10
0
10
2019 2020 2021 2022 2023
North Macedonia - Evolution of the Current
account balance (% GDP)
Services balance Goods balanceCurrent account balance (rhs) Net FDI (rhs)
Source: Economic Reform Programme (ERP) 2021.
Page 8 of 48
3. PUBLIC FINANCE
In 2020, North Macedonia’s public finances deteriorated greatly due to the COVID-19
crisis. The slowdown in economic activity left its mark on public finances, resulting in a 6.9%
y-o-y decline in government revenue for the full year, while current expenditure increased by
13.9%. Income from direct and indirect taxes fell, compounded by VAT reductions and
deferred tax payments as part of the government’s relief measures. The strongest drop in
revenue came from VAT income (-26% y-o-y), while revenue from social contributions (+7%
y-o-y) was boosted by government subsidies to employers’ contributions. On the expenditure
side, the government increased spending on the health sector and on statutory transfer
payments. In addition, the government needed to budget for four sets of economic measures
adopted between March and October, which provide fiscal and liquidity support to households
and companies. In order to finance the first set of measures, a budget reallocation in April cut
the amount originally planned for capital expenditure in 2020 by 15%. Capital spending
therefore dropped by 9.5% y-o-y, to 3.1% of GDP in 2020 (compared to 3.2% in 2019).
Following two further budget revisions, in May and in October, allocations for transfer
payments increased by 13%, and the fiscal deficit target for 2020 was successively raised,
from 2.3% of GDP in the initial, pre-crisis budget plan, to 8.4%. Ultimately, the general
government fiscal deficit for the full year 2020 amounted to 8.1% of GDP. The programme
estimates that the fiscal impact from automatic stabilisers due to the slowdown in economic
activity amounted to some 3.4% of GDP in 2020. The remainder of the estimated increase in
the deficit target, compared to the initial plan, is due to discretionary support measures.
Government anti-crisis measures supported households and companies. The programme
provides an estimate of the overall total fiscal impact of discretionary measures (2.9% of
GDP). Expenditure on wage subsidies, as the fiscally most significant measure, amounted to
1.1% of GDP. The eligibility criteria for wage subsidies include a revenue drop of at least
30% compared to pre-year. Support measures not directly reflected in the budget include
liquidity support via interest-free credit lines of the Development Bank of North Macedonia
(guarantees constituting contingent liabilities for the government), amounting to 0.6% of
GDP.
Table 2:
North Macedonia - Financial sector indicators
2016 2017 2018 2019 2020
Total assets of the banking system (EUR million) 7 233 7 513 8 187 8 945 9 490
Foreign ownership of banking system (%) 69.4 70.1 71.4 72.8 75.0
Credit growth 6.5* 5.9 7.6 6.1 4.1
Deposit growth 5.4 5.1 9.4 9.2 6.2
Loan-to-deposit ratio 87.0 87.7 86.2 83.8 82.0
Financial soundness indicators (end of period)
- non-performing loans** 6.6 6.3 5.2 4.8 3.4
- net capital to risk-weighted assets 14.0 14.2 15.0 14.8 15.3
- liquid assets to total assets 30.9 29.8 30.6 31.9 32.5
- return on equity 13.6 13.5 16.0 11.7 11.3
- forex loans to total loans (%) 44.9 42.5 41.4 42.3 42.3
* corrected for the write-offs
** including the impact of write-offs.
Sources: National Central Bank, IMF, Macrobond.
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The government plans to return to expenditure-based fiscal consolidation starting in
2021. Following a 3.5 pps. improvement in 2021 as crisis support is gradually withdrawn, the
general government deficit is expected to decline by a further 1.7 pps. between 2021 and
2023, to -3.2%. However, the government forecasts that it will only reach and fall below its
pre-crisis level (2019: -2.2%) in 2025. The primary balance will improve from -3.6% of GDP
in 2021 to -1.9% in 2023, and further to -0.9% in 2025. Consolidation will be entirely based
on a reduction in the expenditure ratio (-2.6 pps. between 2021 and 2023 to 35%). This relies
on containing current expenditure, mainly transfers and subsidies. Capital expenditure, on the
other hand, is expected to increase significantly, both in nominal terms and as a share of GDP.
After a temporary rise in 2021, the revenue ratio, already low by regional comparison, is
projected to decline by 0.8 pps. to 31.8% in 2023. This puts into focus the country’s restricted
tax base and its persistent problems with revenue collection. These two issues prevent a better
balanced fiscal consolidation and a swifter achievement of a balanced primary budget. The
ERP’s projection for the cyclically-adjusted primary balance points to a significant tightening
in 2021 and a broadly neutral stance afterwards. Overall, the projected mid-term return to
fiscal consolidation is not underpinned by explicit savings measures. Rather, it relies on
projected strong growth; phasing out of anti-crisis support measures; and (not quantified
effects from) improvements in public financial management.
In 2021, the government expects the fiscal deficit to narrow as support measures are
phased out. The 2021 budget projects a general government deficit of 4.9% and is based on
expectations of 4.1% real GDP growth and 1.5% inflation. Under this scenario, revenue
would rise by 0.5 pps. y-o-y to 32.6% of GDP, and expenditure would drop by 2.9 pps. to
37.6%, mainly due to a large decline in subsidies and social transfers which had increased
greatly in 2020 through government anti-crisis support. Still, capital expenditure is expected
to increase by 50% and to amount to 4.3% of GDP. Almost 45% of tax revenue would be
generated from VAT, which is about the average of the past 5 years. Financing needs in 2021,
including foreign debt repayments totalling 5.3% of projected GDP, and domestic debt
repayments in the amount of 0.9% of GDP, are estimated at some 11% of GDP. They would
Table 3:
North Macedonia - Composition of the budgetary adjustment (% of GDP)
Change:
2020-23
Revenues 31.5 32.1 32.6 32.0 31.8 -0.3
- Taxes and social security contributions 27.0 27.7 28.1 27.8 27.7 0.1
- Other (residual) 4.5 4.4 4.5 4.2 4.0 -0.4
Expenditure 33.7 40.5 37.6 35.8 35.0 -5.5
- Primary expenditure 32.5 39.2 36.2 34.5 33.7 -5.6
of which:
Gross fixed capital formation 3.4 3.6 4.3 4.3 4.8 1.2
Consumption 10.0 11.7 11.6 11.0 10.4 -1.2
Transfers & subsidies 18.9 24.0 20.3 19.2 18.4 -5.6
Other (residual) 0.2 0.0 0.0 0.0 0.0 0.0
- Interest payments 1.2 1.3 1.3 1.4 1.3 0.1
Budget balance -2.2 -8.4 -4.9 -3.8 -3.2 5.2
- Cyclically adjusted -2.6 -6.5 -3.9 -3.5 -3.6 2.8
Primary balance -1.0 -7.2 -3.6 -2.5 -1.9 5.3
- Cyclically adjusted -1.4 -5.2 -2.5 -2.2 -2.3 2.9
Gross debt level 40.6 51.2 53.2 53.3 53.7 2.5
Sources: Economic Reform Programme (ERP) 2021.
2019 2020 2021 2022 2023
Page 10 of 48
be funded through domestic (3.3% of projected GDP) and foreign borrowing, including a
Eurobond1.
Fiscal measures planned by the government for 2021 are tilted towards temporary crisis
mitigation through income and liquidity support for households and companies. Government support remains focused on those sector that are particularly hard hit by the
crisis. Moreover, most government measures for 2021 are being continued from the previous
year without a proper impact assessment having taken place. This is also true of the
government’s liquidity measures, such as credit guarantees for the private sector, that require
a thorough analysis of fiscal risks and options for mitigating these risks. Crisis-mitigating
support measures certainly need to be phased out carefully, to avoid a sudden, large-scale
failure of companies that are no longer viable without the support. Nevertheless, to bolster the
recovery, firm-level support needs to become more targeted towards companies that were
financially solvent before the crisis. In this regard, improving the effectiveness of state aid
policy through a functioning state aid registry including performance indicators informing the
state aid program designs would be useful. Support to private investment should have
productivity-enhancing potential, focus on “green” technologies and digitalisation, and export
diversification. The government can also bolster the economic recovery through its ambitious
public investment agenda. To this end, projects must be more clearly focused on productivity-
enhancing investment. They should be prioritised according to transparent criteria and
possible obstacles to their timely implementation must be removed. Equally, the possibility of
tax deferrals for companies (and households) should be carefully calibrated as the recovery
progresses. This will help to avoid the accumulation of tax arrears that might ultimately create
sizeable liquidity problems and result in default.
1 On 3 March 2021, the government placed a seven-year Eurobond worth EUR 700 million due in March 2028.
It is its 8th Eurobond.
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Box: Debt dynamics
After a large increase in 2020,
general government debt is
projected to broadly stabilise by
2023. General government debt
rose markedly due to significant
external and domestic borrowing in
2020, and amounted to 51.3% of
GDP at the end of 2020 (+10.6 pps.
compared to end-2019). Apart
from the large foreign inflows
needed to fill the crisis-related
financing gap2, the government
also needed to roll over EUR 180
million of the 2015 Eurobond
maturing in 20203. After rising by
2 pps. y-o-y in 2021, because of
the primary balance and interest
payments, the debt ratio is
projected to remain stable in 2022
and rise further, by 0.5 pps., in
2023. From 2022, the government forecasts that the debt-reducing real-growth effect would
supersede the debt-driving impact of the primary deficit, which is expected to decline gradually. In
2023, the increase in the debt ratio would come mainly from increased borrowing for replenishing
government deposits (stock-flow adjustment), according to the government.
Debt financing of public investment is expected to peak in 2023. Although the dynamics of
general-government debt are driving the overall rise in public debt (overall public debt was
60.2% of GDP in 2020, including the debt of public enterprises), government-guaranteed
public debt is also likely to rise further. The government forecasts that government-
guaranteed public debt will peak in 2023, as loans are released to finance public-investment
works carried out by state-owned enterprises. This is in contrast to the projection of last year’s
programme, which expected loan disbursements for these purposes to end after 2021, but may
be explained by the postponement of a number of public works projects in 2020, as crisis-
related needs prevailed.
The structure of government debt contains moderate risks. Maturities of domestic issues
(share of 30-yr bonds in the portfolio) have lengthened further in 2020. There was also an
increase in the average time to maturity (7.3 years for domestic debt, and 5.5 years for total
debt). However, given the large inflows of foreign financing in 2020, the share of foreign
currency debt increased in 2020 compared to a year earlier. This highlights vulnerabilities in
the event of exchange rate depreciation (mitigated by the de facto currency peg to the euro).
The share of euro-denominated in total foreign currency debt declined somewhat in 2020 (-
1.8 pps. y-o-y to 91%), yet it is still comfortably above the minimum threshold set by the
2 The government issued a six-year EUR 700 million Eurobond, and received external loans from the IMF
(EUR 176 million), the World Bank (EUR 140 million) as well as a first tranche (EUR 80 million) of Macro-
Financial Assistance from the EU (October).
3 In 2023, the 2016 Eurobond (EUR 450 million) matures, followed by the 2018 Eurobond (EUR 500 million) in
2025.
North Macedonia
Composition of changes in the debt ratio (% of GDP)
2019 2020 2021 2022 2023
Gross debt ratio [1] 40.6 51.2 53.2 53.3 53.7
Change in the ratio 0.2 10.6 2.0 0.1 0.5
Contributions [2]:
1. Primary balance 1.0 7.2 3.6 2.5 1.9
2. “Snowball” effect -0.5 2.7 -1.7 -2.0 -2.4
Of which:
Interest expenditure 1.2 1.3 1.3 1.4 1.3
Growth effect -1.2 1.9 -2.0 -2.3 -2.6
Inflation effect -0.4 -0.4 -1.0 -1.0 -1.0
3. Stock-flow adjustment -0.3 0.7 0.1 -0.4 0.9
[1] End of period.
[2] The snowball effect captures the impact of interest expenditure on accumulated
debt, as well as the impact of real GDP growth and inflation on the debt ratio
(through the denominator).
The stock-flow adjustment includes differences in cash and accrual accounting,
accumulation of financial assets and valuation and other effects.
Source: Economic Reform Programme (ERP) 2021, ECFIN calculations.
Page 12 of 48
government (85%). The debt portfolio also remains exposed to risk from interest rate
developments, given the considerable (and, in 2020, increasing) share of domestic currency
debt at variable rates (yet, at 22% much below the government’s maximum threshold of
40%). The programme considers these risks by testing the sensitivity of public debt to interest
and exchange rate risk. Over the medium-term horizon, the government is likely in a position
to refinance more of the maturing external debt by new domestic issuance, given the recent
extension of the maturities of domestic issues. The improved structure of public debt is likely
to ease financing conditions for the government. This will allow the government to meet its
considerable requirements to finance the deficit and roll over maturing domestic and foreign
debt in 2021-2023 (the programme calculates that the combined value of deficit finance and
rolled-over debt that must be financed is about 10% of GDP on average per year). The
government plans to meet these requirements by turning to domestic and foreign sources,
including another Eurobond in 2021.
Fiscal consolidation plans are subject to implementation risks, including only timid
efforts to increase tax revenue. The government could strengthen its commitment to fiscal
consolidation by making fiscal policy initiatives more consistent, and by pursuing its declared
intention to improve revenue collection in a more determined manner. Recent policy measures
and announcements of new policy initiatives have been ambiguous, as they frequently involve
further fiscal expansion (privileged pensions, public sector wage growth, subsidies, capital
spending, bailout of local government units) or erosion of revenues (discussion about a zero
personal income tax rate for the ICT industry, widened application of a preferential VAT rate
in the catering and craft sector and discussion of preferential regime for the agriculture sector
and for export-oriented companies, a discussion about tax amnesty, for example). In
December, the government adopted the Tax System Reform Strategy which foresees
measures to strengthen revenue collection i.e. by broadening the base through the elimination
of tax expenditure. However, at the same time, the Reform Strategy foresees further tax
incentives for companies and households through the tax base of CIT and PIT. The
introduction of new permanent tax incentives goes against the government’s declared
objective of broadening the tax base and the need to increase the revenue-to-GDP ratio, and
also raise concern with regard to fiscal discipline and debt sustainability.
Box: Sensitivity analysis
The programme includes a sensitivity analysis of the fiscal deficit based on three parameters.
The first parameter is GDP growth. If average annual real GDP growth is lower than projected,
by 1.3 pps. in 2021-2025, the budget deficit would increase by an average of 0.7 pps. per year.
The second parameter is capital expenditure. Lower capital expenditure (about two thirds
realisation) would imply a reduction in GDP growth by 0.7 pps. per year and an increase in the
deficit by 0.3 pps. on average annually. The third parameter is tax collection. If tax collection
drops by 5% per year, this would imply a budget deficit of 4.2% on average in 2021-2025
(compared to 3.3% in the baseline scenario, and to 3% in the same risk scenario in last year’s
programme for 2020-2022). The programme also assesses the potential impact on debt-servicing
costs of external government debt arising from higher interest rates (+1 pp. compared to the
baseline) and a 10%-appreciation against the euro of other currencies in the portfolio.
Page 13 of 48
The programme anticipates a medium-term shift towards growth-enhancing public
expenditure and measures to address weaknesses in the management of capital
spending. Partly because of crisis-related needs, current expenditure was even more tilted
towards transfers in 2020, including pensions, and subsidies than in previous years (transfers
accounted for 72% of total expenditure). Capital expenditure was again significantly under-
executed, also to finance the additional transfer spending. In general, the government is aware
of impediments to raising the execution rate of budgeted capital expenditure, and has started
to initiate reforms. For example, in the 2021 budget, it introduced a new capital expenditure
rule, which provides for reallocation of budgeted funds among budget users if a certain
amount of the budget has not been used within a set period of time. In addition, the
government adopted an action plan in December, containing measures to improve the
management of public investment, based on the 2020 Public Investment Management
Assessment (PIMA) by the IMF. However, overall there is limited progress so far in
implementing the PIMA recommendations. Looking forward, the government expects capital
expenditure to increase from 4.3% of projected GDP in 2021 to 4.8% in 2023. On the other
hand, public consumption, as a share of GDP, is projected to decline after 2021, mainly as a
result of lower growth in goods and services expenditure post-crisis. It is important that that a
drop in current expenditure consists in permanent savings, unlike in previous years, when a
decline in collective consumption remained based on temporary cuts. If realised, these
dynamics would improve the quality of public spending, but this is subject to the
aforementioned risks.
Improving the legal framework for public–private partnerships (PPP) would be a first
step towards alternative ways of implementing public investment. Fiscal constraints and
marked weaknesses in project implementation by state enterprises increasingly necessitate
additional solutions to close the large public infrastructure gap. The current law on PPPs and
concessions is marked by a number of weaknesses which often prevent desirable outcomes of
projects. Municipalities, which are the most active users of PPPs, lack financial flexibility and
technical expertise. Public bodies that wish to use PPPs for major projects complain about a
lack of detailed administrative guidelines on selecting, implementing and managing PPP
projects. There is often limited central oversight, as each contracting authority sets its own
contract formats and terms and conditions. The monitoring of fiscal risks is also not
sufficiently ensured: contingent liabilities arising from PPPs and from capital projects
financed by the municipalities are not reported to the government. The government has
finalised a first draft of the new PPP law, to introduce amendments that would address these
shortcomings and ensure that PPPs would become an efficient vehicle for implementing
public infrastructure projects, while mitigating potential fiscal risks involved in these
contracts. However, severely limited capacities at ministerial level to administer PPPs remain
a major bottleneck to their extended use.
The government further improved the fiscal framework and transparency of public
finances, but systematic information on enterprise-level support is missing. In December,
the government adopted a new draft Organic Budget Law (OBL), which provides for the
introduction of fiscal (deficit and debt) rules and an independent fiscal council, as well as for
a proper medium-term budget framework. This would bring significant improvements to the
way public finances are managed, despite some shortcomings related for instance to the too
broadly defined escape clauses of the fiscal rules. However, the law still needs to be passed by
parliament and accompanied by secondary legislation, which could lead to protracted
implementation. In addition, the government made public finances more transparent by
publishing quarterly data on the finances of public enterprises and municipalities. Fiscal
documentation does not yet include those public entities that would, under international
accounting standards, be classified as belonging to the government sector. However, the fiscal
Page 14 of 48
rules in the new draft OBL would apply to the general government whose definition is
planned to be based on ESA 2010 requirements. Although the government has a dedicated
webpage listing beneficiaries of COVID-19 related support, the allocation of subsidies at
company level generally remains opaque with regard to both the sums received by
beneficiaries and the criteria for allocating support. Transparency is essential with a view to
using funds in a targeted, efficient, and growth-enhancing manner, and could be much
increased through the setting up of a proper registry of state aid.
4. KEY STRUCTURAL CHALLENGES AND REFORM PRIORITIES
This chapter sets out the Commission’s independent analysis of North Macedonia’s economy
and identifies the main structural challenges the country faces. Addressing the immediate
impact of the COVID-19 pandemic has been a priority for the government. However,
medium- to longer-term prospects for both economic growth and resilience to external shocks
will depend on North Macedonia’s ability to implement structural reforms. Each of the main
challenges faced by the country influences overall competitiveness in its own way. However,
because these challenges are very often mutually reinforcing, it will be essential to address
them to boost productivity and inclusive growth in the medium-to-long term. The three most
significant challenges the Commission identified are: (i) improving the quality and relevance
of the education system to increase employment and mitigate skills mismatch levels, (ii)
increasing the competitiveness of domestic companies and their integration into global value
chains (iii) formalisation of the economy.
Education outcomes are not sufficiently linked with the needs of the labour market which
prolongs the transition from school-to-work, feeding the informal economy, out-migration
and poverty. The informal economy distorts competition, decreases the quality of the business
environment, leads to shortfalls in public revenue, and leaves some workers without social
protection or with only limited rights. Accompanied by COVID-19 induced disruptions,
failure to address the underlying obstacles that drag down the competitiveness of domestic
companies will damage the country’s growth prospects and trade balance. Disruptions to
global value chains caused by the pandemic require actions to retain, strengthen and expand
North Macedonia’s attractiveness as a participant in these value chains.
North Macedonia also needs to continue to tackle corruption, improve the rule of law and
strengthen institutions in order to promote competitiveness. Addressing these fundamental
concerns is a prerequisite for successfully transforming the economy. The Commission is
closely following the issues concerning the strengthening the rule of law and the fighting of
corruption in its Enlargement Package North Macedonia report.
Key challenge #1: Improving the quality and relevance of the education system to increase
employment and mitigate skills mismatches
The persistent structural challenges in the labour market have been further exacerbated
by the COVID-19 pandemic. The labour market has improved in the past decade, and this
has been reflected by an increase in the average salary. But this improvement was slowed by
the unpredictability of the political situation in 2017. Improvements in the labour market were
finally halted altogether by the COVID-19 pandemic. The employment rate (20-64) decreased
slightly by 0.7 pps. during the year (falling from 59.2% in 2019 to 58.5% in the third quarter
of 2020). The labour force participation rate (20-64) decreased even more, falling from 71.5%
in 2019 to 69.8% in the third quarter of 2020, showing that people have tended to withdraw
from the labour market rather than look for a job. This is corroborated by the slightly
shrinking unemployment rate (among 15-74 year olds), which fell from 17.3% in 2019 to
16.5% in the third quarter of 2020 – well above the EU-27 average. The impact of the
Page 15 of 48
COVID-19 pandemic, as demonstrated by the main socioeconomic indicators, has so far been
partially mitigated by the package of measures adopted by the government and a larger
negative impact of the crisis is only expected to become apparent in 2021. North Macedonia’s
economic reform programme acknowledges the deficiencies of the labour market, but does
not propose measures to address them.
Some fundamental structural weaknesses of the labour market remain. Women and
young people are particularly exposed to unemployment and inactivity, as are people with
disabilities and the low-skilled, particularly Roma. The population is also ageing: the share of
the population aged 0-14 decreased from 19.4% in 2005 to 16.4% in 2019), while the share of
older people (aged 65 and above) increased from 11.1% to 14.08% during the same period.
The long-term unemployment rate stood at 12.4% in 2019 (15-74) and continues to account
for most of the overall unemployment rate. The quality of available jobs remains an important
issue fuelling the emigration (‘brain-drain’) of talented people: 1 in every 4 (27.6%)
employed young people works in a field that does not correspond to their level of education
(World Bank, 2020). The regional disparities are strong, as the employment gap between the
southeast (the best-performing region) and the northeast (the worst-performing region)
remains around 25 percentage points.
Young people in particular continue to face difficulties in entering the labour market. 45% of young people stay unemployed for 4 years or longer after finishing school, while only
7.3% are unemployed for less than 1 year (Labour Force Survey, 2019). The countrywide
implementation of the Youth Guarantee in all 30 employment centres in 2019 led to a
reduction in youth unemployment (those aged 15-24) from 45.4% in 2018 to 35.6% in 2019,
but youth unemployment still remains high. Similarly, the share of young people not in
employment, education or training decreased from 24.1% in 2018 to 18.1% in 2019.
However, this share still remains substantially above the EU average for the same period
(10.1% in 2019). The report evaluating the effectiveness of the Youth Guarantee in the
country has still not been released. Importantly, looking at the larger group of people aged 20-
34, the broad gender gap (25.3% of men not in employment, education or training (compared
to 37.4% of women) indicates the social conventions or pressures which place higher
importance on women’s roles within the family (OECD, 2020).
Active labour market policies are still not sufficient to help jobseekers find sustainable
employment, while employment activation remains weak. Despite the countrywide
implementation of the Youth Guarantee, there has been no comprehensive monitoring and
impact assessment of the effectiveness of active labour market policies for many years. The
impact of revised legislation on these policies is also not clear. Active labour market policies
have a limited scope, as they cover less than 10% of the unemployed and less than 25% of the
poor. The capacity of the public employment service to give job mediation and implement
active labour market policies is also weak due to lacking human and financial resources.
The insufficient relevance and quality of education, combined with the structure of the
enterprise sector, contributes to skills mismatches. This leads to persistent
unemployment and underuse of young people’s potential. The education system
contributes to the lengthy school-to-work transition by failing to identify and meet the needs
of the labour market. The skills mismatch continues to be a major impediment to people
finding work. This is because of the discrepancy between the curriculum of secondary schools
offering vocational education and training (VET) and the demands of the labour market (ETF,
2020). It is recommended to improve career guidance and establishing a mechanism for
monitoring quality and relevance of curricula, including in private universities. North
Macedonia is putting in place an institutionalised process and tools for monitoring/forecasting
skills needs to adequately align VET, higher education, and up- and re-skilling offers to
Page 16 of 48
labour market needs. The national qualification framework, that was referenced to the
European Qualifications Framework in 2016, was designed to support modernisation of
education and training, with a view to improving quality and adaptability of education to
labour market needs, and promoting lifelong learning and mobility.
North Macedonia’s education system does not give young people enough of the key skills
and knowledge they need to actively participate in the labour market. This continues to
hinder companies’ competitiveness and their deeper integration into the global economy.
Despite substantial improvements in the 2018 Programme for International Student
Assessment (PISA) compared to the 2015 study, North Macedonia still ranks low among the
other participants (68th place out of 78 participating countries) and compared to its regional
peers. Even the highest-performing students scored only around the OECD average. The
gender gap is a particular issue, as boys perform worse than girls. This gender gap is far
greater than international averages (North Macedonia has the third largest global gender gap
in reading performance). Other significant gaps are linked to students’ socioeconomic status,
educational track, and language of instruction. The OECD has signalled that there is a specific
problem in fostering the ‘growth mind-set’. For example, more than 60% of the country’s
students agreed with the statement that ‘intelligence is something about them that they can’t
change very much’. This means that many students are unlikely to make the investments in
themselves that are necessary to succeed in school and in life. PISA data also highlight the
need for improvements in the quality of teaching, since half of all students have not achieved
basic literacy and numeracy skills by age 15.
A reform of the education system was planned in the 2018-2025 education strategy, but
this reform requires greater funding. The education strategy and the related action plan
both prioritise providing quality skills to young people to prepare them for society and the
labour market. However, these two documents also both state that financial support is
insufficient and that inter-sector coordination is lacking. If the country’s Agency for Quality
Assurance could function more satisfactorily, this would also help. Public spending on
education is clearly insufficient. North Macedonia has steadily reduced its spending on
education from 4.62% of GDP in 2011 to 3.7% in 2019. This level is currently below the EU-
27 average of 4.7% in 2019 and also below peer-country averages. The education system is
also undermined by the inefficiency of public spending (World Bank, 2019).
Major reforms are being made in VET, but the quality of teaching is still an obstacle.
Approximately 56% of upper secondary students in North Macedonia follow a vocational
pathway (42 641 students in 2019/2020) – a proportion comparable to the rest of the Western
Balkans and higher than the EU average by 13 pps. (EU average is 43%). In 2019, 79% of the
country’s VET graduates subsequently enrolled in tertiary education, compared to 53% of
students from general schools (World Bank, 2019). The low transition of students from
general upper secondary education to higher education means that almost half of those who
leave secondary school without further education have not acquired a specialisation to
participate in the labour market. The three-year and four-year VET curricula were revised in
2019, and the development of the three regional VET centres (Tetovo, Kumanovo, Ohrid) is
under way. The lack of technical skills among vocational-school graduates is considered a
major bottleneck by companies in North Macedonia. This is because the teaching and learning
methods in VET schools are largely theoretical, offer limited practical training, and suffer
from a lack of teaching and learning materials (OECD, 2020). There is a need to further invest
in the professional development of VET teachers and introduce a more flexible, modularised
VET curriculum with the direct involvement of employers.
Participation in lifelong learning has increased slightly. The percentage of adults
participating in learning (2.8%) is significantly lower than the corresponding EU-27 average
Page 17 of 48
of 10.8% (2019). Based on the strategy for adult education 2019-2023, a pilot project with the
Adult Education Centre saw the introduction of two qualifications, although these were only
made available in Skopje. Further development of qualifications and up-skilling/re-skilling
programmes throughout the country are key to integrate medium-skilled and low-skilled
people into the labour market. Furthermore, promoting lifelong learning and the strengthening
of informal education should help to improve workers’ technical and managerial skills. This is
needed to raise productivity in companies and industry.
The continuing gender gap undermines North Macedonia’s overall economic potential. The gender employment gap (the percentage-point difference in the employment rate of men
and women aged 20-64) stood at 18.9 pps. in the third quarter of 2020, while 68.6% of the
inactive population (20-64) in the same period were women. This is partly due to: (i)
women’s traditionally lower presence in the labour market; (ii) previous disincentives for
women to work; and (iii) the burden of childcare and family care. Women are much more
likely to be low paid. Estimates of earnings indicate a significant gender pay gap and the
potential for discrimination in the labour market against women. Women in North Macedonia
also have a working life that is on average 12 years shorter than that of men (Gender Equality
Index, 2019).
The emigration of workers is a serious impediment to business, and poses a substantial
risk of brain-drain for North Macedonia. The shortage of jobs – and secure, well-paid jobs
in particular – is the biggest challenge. This makes it especially difficult to prevent young
people from leaving the country. The inability to predict the country’s economic prospects is
also considered a key factor that is fuelling the emigration of young and skilled workers.
According to projections, the share of the population aged 65 and above will double from
12.5% in 2015 to 25.4% in 2050, placing significant strain on the social-protection system.
This trend will gradually reduce the share of the working-age population (those aged 15-64)
from 70.6% in 2015 to 60.4% in 2050 (ILO, Decent Work Programme, 2019). About 59% of
businesses struggle (OECD, 2020) to find workers with appropriate skills.
Informal employment has decreased, but remains at a high level. The informal
employment rate fell to 13.8% in 2019, but remains structurally high (Labour Force Survey,
2019). Most informal work is concentrated in agriculture, where 52.3% of work is informal.
However, other sectors such as construction, manufacturing and wholesale trade also have
high levels of informal employment. The government’s focus on reducing the informal
economy is in accordance with its 2018-2022 strategy and its 2018-2020 action plan (EBRD,
2019).
Reform Measure 18 of the ERP “Further development of the qualification system”, is rolled
over from the last year. The measure reflects the key policy reforms presented in the ESRP
adopted by the government. The measure addresses the key bottleneck of the education
system and builds on the activities implemented in 2020. To implement this measure, the
modernisation of three regional VET centres is key, and further development of such centres
of excellence is needed throughout the whole country. The measure presents indicators and a
budget in the fields of employment, education and social policy. Although both the ESRP and
the inclusion of the measure in the ERP signals that education is among the top priorities of
the government, the measure’s expected impact on competitiveness could be further
strengthened.
Page 18 of 48
Key challenge #2: Improving the competitiveness of domestic companies and integration in
global value chains
Domestic companies’ low and slow-growing productivity hinders their competitiveness.
North Macedonia’s businesses suffer from unsophisticated technology, limited capacities of
production and innovation, inconsistent quality of goods and services, deficient managerial
skills and competition from a large informal sector. Further constraints to modernisation of
technologies and business processes as well as to expanding manufacturing and
internationalisation capacity result from the skills mismatch in the labour market on both
managerial and operational level, caused by weakenessess in the education system and a
complex application of business regulations.
The COVID-19 pandemic has put a significant additional burden on companies, causing
them to cut their investment in development of human and physical capital. The
pandemic is expected to exacerbate the slowdown in regional productivity (World Bank,
2020). It has negatively affected profitability and turnover in 90% of companies and caused a
drop in their productivity (International Labour Organisation, 2020). The highest share of
enterprises reporting a drop in revenues operate in sectors affected by the government ban on
business operations and curfew restrictions, specifically transportation, storage,
accommodation and food services, construction, trade, and professional, scientific and
technical services (ILO, 2020).
The COVID-19 crisis has also shown the vulnerability in global value chains, which
represented 80% of global trade before the crisis (IMF, 2019). North Macedonia’s links to
global value chains are still predominantly concentrated in services and low- to medium-value
manufacturing (IMF, 2019). Following the outbreak of the crisis, 45% of the country’s
businessess reported a decline in demand for products and services, 38% reported weaker
confidence in supply chain partners, and 35% reported disruptions in the sourcing of raw
materials (ILO, 2020).
Although tackling the immediate challenges of the COVID-19 crisis has been an
immediate priority, reform measures to foster the competitiveness of domestic
companies need to be strengthened further. Raising the competitiveness of local companies
will require higher investments in human and physical capital and improving the overall
business environment, including better enforcement of business regulations and corporate
governance, as well as better services including trade and transport logistics. Producitivty
could be further improved by more investment in research and innovation, further cooperation
between SMEs and stimulating their geographic agglomeration and interconnectedness, as
well as with further regional integration.
Especially in this challenging period, businesses need a fair, predictable and functional
regulatory framework, with an effective and increasingly digital public administration
(ILO, 2020). The pandemic has amplified the need for an enabling business environment,
with low administrative burden and improved access to public services, allowing businesses
to cope with the new challenges of the pandemic. Consequently, full implementation of the
2019 Law on inspection supervision and implementing transparent and consistent procedures
for inspections would increase the ease of doing business. The COVID-19 pandemic has also
demonstrated an urgent need to further simplify access to public services, in particular by
digitalising the public administration. Setting up a fully-operational online ‘one-stop-shop’
system for all business-related permits and licences could have an additional benefit for on the
business environment.
Page 19 of 48
In recent years, authorities have been focusing on attracting FDI, which in 2019
amounted to 3.8% of GDP, as a way of increasing competitiveness of domestic
companies. However, the COVID-19 pandemic has made it much more difficult to attract or
even retain FDI. Initial estimates suggest that the decline in global FDI caused by COVID-19
will range from 30% to 50% in 2020-2021 (World Bank, 2020). Therefore, attracting and
retaining FDI will require prioritisation and the strengthening of targeted public policies to
address the underlying structural obstacles affecting domestic companies’ competitiveness. In
particular, attracting FDI to higher-value segments of international value chains will depend
on North Macedonia’s ability to reform its education system and labour market. Attracting
FDI could further benefit from opportunities to co-operate with local economy on innovation
activities.
As attracting new FDI is becoming more challenging, it is a priority to use
multinationals already present in the country as a vehicle for productivity growth.
Multinational companies operating in the country perceive insufficient technological
development, weak adherence to quality requirements, lack of compliance with international
standards and certificates as well as limited production capacity of domestic partners as the
main weaknesses constraining their integration with domestic industry (Finance Think, 2019).
This requires that the authorities should take measures to facilitate technological upgrading
and investment in reliability and quality of production, and help domestic companies to
develop their technological capacity. In addition, digitalisation of industry is a major driver of
productivity gains and should be further strengthened. North Macedonia is currently preparing
its smart specialisation strategy, which will be based on the mapping of economic, innovative
and scientific potential in the country. This strategy should therefore consolidate the country’s
economic policy priorities and support the further development of sector-level strategies in
the relevant fields such as education and skills, industry, research and innovation, as well as
attracting FDI.
Instead of tackling the country’s underlying structural challenges and business
environment issues, the government’s flagship policy to attract FDI and improve
domestic firms’ competitiveness relies on providing various forms of State aid to
businesses. The special temporary framework for State-aid measures to support affected
businesses and the economy during the COVID-19 crisis was justified. However, further
extended use of State-aid schemes as a measure to support domestic companies must be based
on close, continuous assessment of the business environment issues and clear policy
objectives. The Law on financial support of investment, based on which part of state aid is
being distributed, retains certain features that are problematic in view of the EU acquis on
State aid. The Law on strategic investments adopted in 2020 with the aim of supporting so-
called strategic projects, lacks a well-elaborated policy framework and implementing
regulations. There is an urgent need to develop a comprehensive and transparent registry of
State aid and to create a more effective State aid notification system. More action is needed to
monitor the cost-effectiveness of these schemes and their impact on competitiveness, to
ensure coordination of different programmes, and to strengthen the capacity of the
Competition Agency and of institutions providing State aid.
The regulatory framework’s lack of transparency and predictability continues to
negatively affect the business environment and the competitiveness of domestic
companies, in particular SMEs. Increasing the efficiency and transparency of public
administration, reducing the time and costs of commercial disputes and promoting alternative
dispute resolution mechanisms would address some of the factors limiting the competitiveness
Page 20 of 48
of domestic companies. In 2020, North Macedonia Andrew up initial list of 370 para-fiscal
charges at central and local levels, but further steps are now needed to rationalise them.
Further developing certain service sectors could be an opportunity for domestic
companies. Services such as logistics, transportation, and information and communication
technologies are fairly unsophisticated at present. This forces foreign companies to use
alternatives outside the country. According to multinationals operating in the country, 91% of
services they need can be found in North Macedonia. However, 30% of the companies
surveyed found these services not to be of the required quality standards (Finance Think,
2019). This assessment is also reflected in the relatively small export share of service
industries. A shift in public policies in support of upgrading services closely linked to the
creative and production industries could allow the country to increase the role played by
services in improving productivity and creating value.
The COVID-19 crisis may also offer opportunities for domestic companies. Further
efforts should be made to integrate the country’s companies into global value chains in a
sustainable way, so that domestic companies can further diversify their export structure
and mitigate future shocks. North Macedonia needs to consider how to better position itself
on the global market, if the pandemic leads to a further retreat from trade integration, with
higher trade barriers and re-shoring of production. The country should act to ensure that it can
retain, strengthen, or expand its attractiveness as a participant in the global value chain by
ensuring the free flow of manufactured goods across borders to ease the pathway to greater
integration and diversification. To benefit from these opportunities, North Macedonia should
reduce trade costs by streamlining its non-tariff measures and closing the remaining gaps in
the main transport corridors. Reducing entry barriers in network industries such as electricity
and telecommunications and undue restrictions on professionals like attorneys, accountants,
and engineers would further enhance the trade in services. The gaps in national and
international digital infrastructure should be bridged and digital cohesion enhanced.
The Economic and Investment Plan for the Western Balkans will help increase the
competitiveness of North Macedonia’s economy backed by a green and digital
transition. A substantial investment package, which is at the heart of the Economic and
Investment plan, will direct a large majority of support towards key productive investments
and infrastructure. This will support the twin green and digital transition and the development
of connected, competitive knowledge-based, sustainable, innovation oriented and thriving
economy, with an increasingly dynamic private sector. Circular-economy principles, as a
basis for the Economic and Investment Plan and defined in the green agenda for the Western
Balkans. The principles could significantly foster sustainable production and consumption.
Increasing resources productivity within the economy would allow local SMEs to benefit
from the business opportunities of increased resource efficiency and by further access to
innovative technologies.
Building a common regional market has the potential to further enable competitiveness
and growth. The common regional market is based on EU standards and will help the
country integrate in regional and European value chains. It will also help make the economy
more attractive for FDI in tradable sectors, notably by increasing the size of its market.
Further connectivity with neighbouring countries in transport and energy will strengthen
access to, and integration into, the regional market. The new Additional Protocol 6 of the
Central European Free Trade Agreement (CEFTA) to liberalise trade in services also opens
new opportunities in the dynamic service sectors, and therefore should be implemented
Page 21 of 48
swiftly. Regulatory and investment moves to create a regional digital space and more
integrated labour markets with neighbouring economies will offer new possibilities for the
country’s young people. This is especially important given the high rates of youth
unemployment.
Key challenge #3: Formalisation of the economy
The informal economy remains deeply entrenched, accounting for a large share of total
output and a large share of total employment. Although the State Statistical Office
estimates that the informal economy accounts for 17% of GDP and 18% of total employment,
other estimates suggest that I could account for as much as high as 37.6% of GDP (IMF,
2019). The country’s informal sector takes various forms, of which the most prominent are
unregistered labour, partially undeclared wages and other irregularities in the enforcement of
the Labour Relations Act. Other practices common to the informal economy include not
issuing tax receipts or invoices, or underreporting turnover. The growing prevalence of
freelance work and personal services provided at home or via the internet often go
unregistered.
Undeclared employment remains a persistent issue and could be exacerbated by the
COVID-19 pandemic. The sectors with particularly high labour informality are agriculture,
construction, household services and wholesale and retail trade. A large proportion of the
population continues to declare itself inactive while likely earning some income from an
undeclared activity. In 2019, 42.8% of the population was classified as inactive, almost 16
percentage points higher than the average EU rate. The COVID-19 pandemic could also have
an impact on informal employment. Given that many of the sectors most badly hit have a high
share of informal workers there could be a drop in informal employment. On the other hand,
workers might have switched from formal to informal labour, partly by falsely declaring
fewer working hours.
Partially unregistered employment and undeclared wages are also widespread. Income
is estimated to be partially or completely undeclared by almost 44% of employees. According to estimates, 27.6% of employees’ social security contributions are paid at a level
lower than the actual salary received (Centre for Research and Policy Making, 2019). Almost
74% of individuals engaging in additional work to their primary source of employment do so
without a formal contract (CRPM, 2019). These workers’ social and health benefits are not
paid in full, and their rights as workers are not fully protected.
The widespread acceptance of this phenomenon contributes to the persistence of
informality. A recent population survey indicates that only 1.6% of individuals in the country
highlighted the informal economy as one of the three basic problems in North Macedonia
(CRPM, 2019). Furthermore, 21.1% of individuals are willing to participate in undeclared
work to get a higher wage (CRPM, 2016). Both employees and employers see benefits in the
arrangement: the employer makes savings by not paying social contributions for the real
amount they pay exceeding the fictitious reported wage, and the employee receives a higher
net salary, albeit by foregoing rights to pension and social protection. The perception that
public services such as healthcare and education are of insufficient quality also discourages
voluntary tax compliance. Because the system designed to protect employees’ rights is not
perceived as efficient and just, many employees are likely to willingly forego institutional
protection of their legal labour rights.
Page 22 of 48
The high proportion of cash transactions and the related practice of not issuing tax
receipts remain an issue. Based on the 2018 Law on anti-money laundering and preventing
financing of terrorism, the maximum amount allowed for cash payments had been gradually
reduced to EUR 500. However, the government abruptly changed the law in 2019 and
increased the maximum allowable cash payment to EUR 3 000. Promoting electronic
payments and limiting the use of cash, in particular for higher-value purchases, would likely
help reduce activity in the shadow economy.
The size of the informal economy may exacerbate the negative impact of the COVID-19
crisis on the economy. The large informal sector narrows the tax base in a context of already
falling tax revenues due to the pandemic. Production in the informal sector is often inefficient,
either because companies remain small enough to avoid being detected or because they use
outdated technology, thus contributing to the lower productivity and competitiveness of the
economy. Companies operating in the informal sector also have more limited access to
finance (which constrains investment) and to qualified workers. Moreover, businesses
operating completely in the informal economy have had no access to government support
schemes in the context of the COVID-19 crisis.
The COVID-19 pandemic has disproportionally affected informal workers. Global
estimates show that informal workers’ monthly average labour income could fall by 27% in
upper-middle-income countries such as North Macedonia as a result of the pandemic. Relative
poverty for informal workers and their families is set to increase by more than 21 pps. (ILO,
2020). Informal workers are deprived of social rights and access to unemployment benefits.
Even though they do have some access to social protection, the COVID-19 pandemic has
confirmed that informal employees are more vulnerable in the event of work-related injury,
when they lose their job, or when they retire. High levels of informality also affect the overall
level of skills in the economy, as informal workers have less access to training, exacerbating
skills shortages. This ultimately generates greater inequality.
The government support measures at the onset of the COVID-19 may have had an
impact on the informal sector. Following the outbreak of the pandemic, the government
introduced employment-retention measures for the most affected sectors including
restaurants, catering services, tourist agencies and transport. To benefit from the employment
retention measure, the companies needed to prove a decrease in revenue of at least 30%
compared to the previous year. Although the revenues in various sectors have declined the
measure may have motivated some companies to understate their revenues at the onset of the
crisis. However, the measure was also accompanied by more stringent tax inspection. The
government softened the eligibility requirements for the potential beneficiaries of the measure
who were self–employed. A cash allowance of 7 000 dinars per household was provided for
the most vulnerable households, including those whose members worked in the informal
economy. The impact of these measures on incentives for companies and individuals to
formalise their business activities is unclear.
Even though COVID-19 poses many challenges, registered businesses still consider
competition from the informal economy to be one of the main obstacles for doing
business in North Macedonia. According to the latest available business environment and
enterprise performance survey (BEEPS, 2019), the activities of competitors in the informal
sector are seen as one of the main obstacles for businesses in the country: 14% of companies
say that competing against companies in the informal sector is one of their main challenges.
Reducing the size of the informal economy requires appropriate institutional structures. Strengthening the skills, expertise and powers of tax officials, emphasis on voluntary
compliance, improving judicial efficiency and ensuring inspectors have greater independence
are key in the fight against the informal economy. Appropriate and timely enforcement of
Page 23 of 48
contracts along with more the transparency of legal changes will have two beneficial effects.
It will increase predictability in the business environment and reduce incentives to participate
in informal activity. Clarifying the mandates of various inspection bodies, increasing their
skills, and further digitalising processes (notably on labour law and occupational safety)
would also help to reduce informality. The COVID-19 crisis has shown the need for and
benefits of further digitalising the public administration, which could also further reduce the
size of the informal economy.
The impact of economic policies and COVID-19 support measures on the informal
economy should be continuously monitored. Continuous increase in the statutory minimum
wage and the introduction of subsidies for employers’ social security contributions to mitigate
the impact of wage increases as well as subsidising social security contributions in certain
sectors, during the pandemic could change the incentives of the in informal economy.
Furthermore, frequent and sudden policy changes related to taxation, such as suspending the
application of progressive taxation, as well as the high level of tax exemptions, create distrust
among taxpayers over whether they will receive equitable treatment, and have an adverse
effect on voluntary tax compliance. Further simplifying the tax and social benefits system to
reduce the number of exemptions, and not necessarily the tax rate, could reduce tax
compliance costs and reduce informality.
In an effort to address the informal economy, North Macedonia developed a 2018-2022
medium-term strategy and an action plan. The strategy was developed using a
participatory approach and reflects the latest OECD recommendations. It recognises that
deterrent measures alone are not enough to effectively reduce the informal economy, and that
the country should address underlying causes such as weaknesses in the labour market and
business environment. However, only limited progress was made in 2020 in implementing the
measures set out in the action plan. The impact of the measures undertaken needs to be
regularly assessed and the measures adjusted accordingly. To ensure that the full set of
measures in the strategy are implemented and to address the underlying causes of informality,
the measures must be further integrated in other sectors’ policies and action plans. The 2018-
2023 SME strategy included measures to combat the informal economy. This is a good
example, and measures to combat the informal economy should be included in other
strategies.
In November 2020, the voluntary disclosure programme was announced, intending to
encourage tax payers to register undisclosed cash. Without an efficient auditing
programme, or robust sanctions against tax evaders, this programme would do little to tackle
informality. It might even increase the risk of eroding tax morale and collection in the future,
undermining the effectiveness of revenue administration and tax policy more broadly. Before
opting for such a programme, North Macedonia should implement a comprehensive action
plan to modernise the country’s tax administration and improve tax morale and awareness.
The role of the Public Revenue Office should be further strengthened, as it currently has no
ability to conduct market inspections or field inspections. There are also no measures to
encourage voluntary tax compliance as the cornerstone of modern revenue administration.
A fully coordinated government approach, with high level political steering, is needed to
successfully develop and implement the action plan in 2020-2022. The government is yet
to prepare a comprehensive evaluation of the implementation of the first action plan for the
2018-2020 period. The subsequent action plan that is yet to be drawn up should contain the
lessons learned from the previous plan. The updated action plan should be wider in scope and
consider all the relevant areas and stakeholders for tackling the informal economy. This
updated action plan should include further measures to address the overall societal acceptance
of informality given that 52.4% of the population considers this as an inevitable part of their
Page 24 of 48
life. Voluntary tax compliance should also be considered. In addition, all fiscal initiatives
relevant for the informal sector, such as changes in minimum wages, social security
contributions and taxation should be taken into account. Furthermore, the action plan should
consider measures to digitalise processes in public administration and introduce risk-based
audits, as both of these initiatives would reduce bureaucracy and the opportunity for
corruption. Given that e-commerce is a growing industry with a high potential to facilitate
informality, the subsequent action plan could also benefit from actions in this field. The
strategy and the action plan should also require an analysis to be made of the impact on the
informal economy of the anti-pandemic economic support measures.
Reform Measure 12 in the ERP “Introducing mechanisms for formalising informal work in
sectors with high incidents of undeclared activities”, is rolled over from the previous year.
The measure aims to implement the 2018-2022 strategy for formalising the informal
economy. The 2018-2022 strategy identifies three salient motives for engaging in informal
business activities, but these motives are not properly addressed by the activities under
Reform Measure 12. The measure focuses mainly on employment policies while ignoring
other important aspects contributing to the informal economy, such as the overall business
environment or taxation, including social security contributions. For the area of taxation, the
Ministry of Finance drafted an ad hoc action plan in 2019 to address the fiscal aspects of
informality, but this ad hoc action plan should be integrated in the overall revised 2021-2022
action plan. Most of the activities in the ad hoc action plan are based on more stringent
monitoring and inspection. The measure also suggests implementing awareness-rising
activities on the benefits of the transition to the formal economy, and introducing a voucher-
based system to promote better working conditions. However, it remains unclear how these
activities of the voucher system will be put in place or implemented. The hoped for positive
impact of the measure on competitiveness is not sufficiently quantified and the impact on
employment and gender is not sufficiently considered. In addition, the measure does not take
into account the impact of COVID-19 on the labour market and undeclared work.
Page 25 of 48
Box: Monitoring performance in light of the European Pillar of Social Rights
The European Pillar of Social Rights, proclaimed on 17 November 2017 by the European Parliament, the Council and the
European Commission, sets out 20 key principles and rights concerning equal opportunities and access to the labour market,
fair working conditions, and social protection and inclusion for the benefit of citizens in the EU. Since the 20 principles are
essential for countries if they are to achieve fair and well-functioning labour markets and welfare systems, they are equally
relevant for candidate countries and potential candidates. The new reinforced social dimension for the Western Balkans
includes an increased focus on employment and social reforms through greater monitoring of relevant policies (EC, 2018).
The Western Balkans Ministers’ Declaration on improving social policy in the Western Balkans (6 November 2018) confirms
that they will use the Pillar to guide the alignment of their labour markets and welfare systems with those of the EU.
North Macedonia faces challenges for a number of indicators of the Social Scoreboard4 supporting the European Pillar
of Social Rights. Despite favourable trends in employment over recent years, the country’s unemployment rate remains high
and has several distinctive structural characteristics, including long-term unemployment, inequality, and large regional
disparities. Because the impact of the COVID-19 pandemic has been cushioned by the government’s support package, the real
impact of the crisis will be seen in 2021.
Women and young people are particularly exposed to
the risk of unemployment and inactivity. Despite
significant improvements due to the successful
implementation of the Youth Guarantee, youth
unemployment (15-29) was 20.3% in 2019, while the rate
of young people (15-24) neither employed, nor in education
or training (NEET) in 2019 was 18.1%. The rate of
inactivity in the labour market is particularly high for
women. In Q3 2020, 42% of women aged 20-64 were out
of the labour market.
Government measures to help people find work or
training are insufficient in scope and volume to
substantially improve the situation. A new legislative
framework and measures to get more people into the job
market is a step in the right direction. However, the
resources allocated for this measure remain scarce
(EUR 11 million for 3 years). The public employment
service could make better use of its well-developed IT
system to track the employment status of participants in
programmes to help people find work or training over the
short and medium terms.
The reform of the social-protection system aims to better target those in need. Social assistance has a very small effect on
the poverty reduction. This is due to both the very small amounts of the benefits that are paid out and insufficient
effectiveness in targeting these benefits at the most needy. The new legislative framework includes the Law on Social
Protection, Law on Child protection, and Law on Social Security of Elders, as well as related bylaws. The framework served
as the impetus for the stronger policy response during COVID-19, since the number of GMA beneficiaries has increased.
Those most at risk of poverty continue to be: (i) young people; (ii) the uneducated; and (iii) ethnic communities such as the
Roma.
North Macedonia has a well-developed statistical system. The State Statistical Office is the primary producer and
coordinator of the statistical system of the country. Since 2004, the Labour Force Survey has been carried out as a continuous
quarterly survey throughout the year, providing quarterly and annual statistics. The Survey on Income and Living Conditions
(SILC) is conducted as a regular annual survey and has been implemented since 2010.
4 The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States’
performance (https://ec.europa.eu/eurostat/web/european-pillar-of-social-rights/indicators/social-scoreboard-indicators).
The 12 indicators are also compared for the Western Balkans and Turkey, with one small adjustment for the age bracket for
the unemployment rate (reducing the upper age bracket to 64 instead of 74 years) for Albania and Kosovo* due to data
availability. The assessment includes the country’s performance in relation to the EU-27 average (performing
worse/better/around the EU-27 average; generally 2019 data are used for this comparison) and a review of the trend for
each indicator based on the latest available three-year period for the country (improving/deteriorating/no change). Data
from 2017-2019 are used and can be found in Annex A.
NORTH MACEDONIA
Equal
opportunities
and access to
the labour
market
Early leavers from
education and training (%
of population aged 18-24)
Worse than EU
average, improving
Gender employment gap Worse than EU
average, improving
Income quintile ratio
(S80/S20)
Worse than EU
average, improving
At risk of poverty or social
exclusion (in %)
Worse than EU
average, improving
Youth NEET (% of total
population aged 15-24
Worse than EU
average, improving
Dynamic
labour
markets and
fair working
conditions
Employment rate (% of
population aged 20-64)
Worse than EU
average, improving
Unemployment rate (% of
population aged 15-74)
Worse than EU
average, improving
GDHI per capita growth N/A
Social
protection and
inclusion
Impact of social transfers
(other than pensions) on
poverty reduction
Worse than EU
average, improving
Children aged less than 3
years in formal childcare
Worse than EU
average, improving
Self-reported unmet need
for medical care
Worse than EU
average, no change
Individuals’ level of
digital skills
Worse than EU
average, no change
Page 26 of 48
5. OVERVIEW OF THE IMPLEMENTATION OF THE POLICY GUIDANCE ADOPTED AT THE
ECONOMIC AND FINANCIAL DIALOGUE IN 2020
Overall: Partial implementation (61.1%)5
2020 policy guidance Summary assessment
PG 1
Use fiscal policy to mitigate the crisis-
induced impact on growth and
employment.
Adopt the Tax System Reform Strategy
2020-2023 and improve revenue
collection capacities in line with the
strategy.
Further improve the transparency of
public finances by publishing regular
fiscal reports on public enterprises and
taking steps towards incorporating them
in the general government statistics in
line with the excessive deficit procedure
methodology.
There was partial implementation of PG 1
1) Substantial implementation. The government has used
fiscal policy to mitigate the crisis-induced impact on growth
and employment. It has adopted four sets of measures
addressing households and companies (i.e. subsidies to wages
and employers’ social contributions), totalling EUR 1billion in
2020, and adopted a fifth set in February. To provide
financing for these measures, two Supplementary Budgets
were adopted in 2020, as well as two decisions for
redistribution of funds between budget users and funds.
2) Partial implementation. On 29 December 2020, following
two public consultations, the government adopted the 2021-
2025 Tax System Reform Strategy and began with the
implementation of measures that address the PG subpart
appropriately. The country has adopted measures to improve
revenue collection, but only a few of them have been
implemented yet as the Strategy was adopted in December
2020 only. The capacities of the two key revenue collection
administrations, the Public Revenue Office and the Customs
Administration, have increased consistently, both through
national funds and sizeable EU assistance. The biggest
challenge ahead is the modernisation of the ICT system of the
PRO.
3) Partial implementation. The country has adopted and
implemented measures that address the PG subpart
appropriately. Public enterprises are now obliged to publish
their reports on the website. As from October 2020, the MoF
started publishing revenues, expenditures and profit / loss for
public enterprises, quarterly at the enterprise level. This PG
subpart is also the subject of MFA conditionality. The country
has adopted measures to include some public enterprises in the
general government fiscal documentation. The SSO is
responsible for EDP notifications, which are regularly
submitted to Eurostat. The data for some public enterprises are
also part of the notifications according to the published list of
units of S13 Government sectorised by the Commission for
Sectorisation (SSO, MF and NBMK). In the new OBL, the
fiscal rules apply to General Government (GG) and the
definition for GG refers to the list of units published by the
SSO for S13 based on ESA2010.
5 For a detailed description of the methodology used to assess policy guidance implementation, see Section 1.3
of the Commission’s Overview and Country Assessments of the 2017 Economic Reform Programmes available
at https://ec.europa.eu/info/publications/economy-finance/2017-economic-reform-programmes-commissions-
overview-and-country-assessments_en.
Page 27 of 48
PG 2
To support the economic recovery,
improve public investment management
to mitigate technical obstacles to
implementation of capital spending.
Establish a comprehensive registry of
state aid and review firm-level subsidies
based on their cost-effectiveness.
Take initial legal and operational steps
to establish fiscal rules and a fiscal
council with a view to strengthening
fiscal sustainability in the medium term.
There was partial implementation of PG 2
1) Partial implementation. The country has adopted
measures to address the PG subpart. The MoF developed a
PIMA Action Plan (adopted in December 2020) in order to
facilitate the implementation of the recommendations of
PIMA conducted by the IMF. In order to improve the
realisation of capital expenditures, the 2021 Annual Budget
Law introduced a new mechanism. Budget users are now
obliged to realize 15% of capital expenditures by the first
quarter, 40% of capital expenditures by the second quarter and
65% of capital expenditures as of the third quarter. In case of
non-fulfilment of this obligation, the unused funds up to the
prescribed limit, are re-distributed by the Ministry of Finance
to the reserves for capital expenditures of the same budget
user, without the right to spend.
2) Limited implementation. The country has announced
some measures to address the PG subpart, but their
implementation is at risk. The country has expressed interest
in asking support from the international community with
regard to providing assistance in developing the state aid
registry, but so far the only progress was initiating a
consultation process though the Department for
Competitiveness and Innovation. The role and involvement of
the Commission for Protection of Competition (CPC) is
marginal. A state aid registry already exists within the CPC,
but it is outdated. It remains unclear who will be in the leading
role with regard to state aid: the Cabinet of the Deputy PM,
the CPC, the Department for Competitiveness and Innovation.
Under the Stabilisation and Association Agreement SAA, it
should be CPC in the lead. Issues related to the Law on
strategic investments with regard to support to strategic
projects remain. There was no implementation regarding the
review of firm-level subsidies. The country has neither
announced nor adopted any measures to address this PG
subpart. The number of state aid providers remains high and
without coordination, particularly with regard to the cost
effectiveness of the granted aid.
3) Partial implementation. In December 2020 the
Government adopted the Organic Budget Law that includes
provisions for fiscal rules and a fiscal council. The OBL was
published on ENER and subject to wide consultation,
including the EUD, ECFIN and the WB. It is now in the
parliamentary procedure. It is not clear yet whether the law
will enter into force in 2023 or whether some articles
(including those on fiscal rules and fiscal council) will be
enforced from 2022 as committed by the Minister of Finance.
Secondary legislation on the establishment of the fiscal
council is not yet elaborated.
PG 3
Closely monitor financial stability
challenges arising as a result of the
coronavirus pandemic and take
appropriate action if needed.
Operationalise the reconstituted
There was substantial implementation of PG 3
1) Substantial implementation. Forceful monetary and
financial sector measures have been adopted to cushion the
short-term impact of the crisis, including inter alia borrower
relief measures such as loan repayment moratoria and loan
restructuring, while monitoring has remained strong. The full
impact of the crisis in particular on asset quality is yet to
become visible, likely requiring further adjustments.
2) Substantial implementation: An MoU has been signed
Page 28 of 48
Financial Stability Committee and
ensure the legal clarification of the
central bank’s macro-prudential
mandate.
Work towards a further implementation
of the denarisation and NPL resolution
strategies, ensuring the effectiveness of
the measures taken and making any
adjustments deemed necessary.
across regulators and enabled the Financial Stability
Committee to start operations, while the draft Law on
Financial Stability that provides the required legal
clarifications is expected to be adopted by the first half of
2021.
3) Partial implementation: Further efforts were made to
implement the denarisation strategy, but the crisis impact
resulted in a partial reversal of the earlier progress. Measures
were also taken to implement the NPL strategy, with the new
insolvency law in early drafting stage with possible adoption
by end-2021.
PG 4
Ensure a whole-of-government approach
and cross-sectoral coordination across
public administration to effectively
respond to COVID-19.
Maintain continuous dialogue with
business organisations, social partners
and civil society on all measures in
response to the crisis.
Take necessary actions to ensure easy
access to digital public services for
citizens and businesses.
There was substantial implementation of PG 4
1) Full implementation: A crisis coordinative headquarters
was formed chaired by the prime-minister. Other coordinative
bodies were also established such as: (i) the managerial
committee for coordination and management of crises; and (ii)
the appraisal group that assesses risks and security threats and
proposes measures and actions for their prevention, early
detection, and management.. Following the adoption of the
decision of 20 November 2020 declaring a pandemic crisis in
the country (until 30 June 2021), the main headquarters for
crisis management was active. Two members of civil society
organisations, elected through a public call, participate in the
work of this body. A centralised information system was set
up to inform the public about COVID-19. The Ministry of
Health issues daily updates to the public through regular press
conferences or press statements. A centralised web site was
set up: www.koronavirus.gov.mk The government also set up
two mobile applications and two national call centres to keep
the public informed about the pandemic. The government
holds its session through the e-government information
system.
2) Substantial implementation: Government engaged in a
dialogue with business organisations, social partners and civil
society when designing measures to respond to the COVID-19
crisis. Additional efforts should be made to extend the number
of participants and topics in public consultation and reduce the
number of laws adopted in shortened procedure.
3) Partial implementation: The national e-services portal
www.uslugi.gov.mk provides electronic services to the public.
In August 2020 a project aimed to develop new e-services and
digitalising state registers began with drafting a list of 135
new services for citizens and businesses. In November 2020
certified electronic signature was introduced.
PG 5
With a view to mitigate the economic
consequences of COVID-19 pandemic
and to stimulate economic recovery,
establish an effective and transparent
mechanism to support the businesses
There was partial implementation of PG 5
1) Substantial implementation. In 2020, the government
developed and started implementing four sets of measures to
improve the resilience of private companies focusing on
SMEs and targeting self-employed. The fifth set of measures
was announced in early 2021. The government has provided
initial public information about money spent and the
Page 29 of 48
affected by the crisis, in particular
micro, small and medium-sized
enterprises and self-employed.
Extend social protection coverage and
provide incentives for businesses and
employees in the informal economy
sector to register and to facilitate their
transfer to the formal economy.
Create a register of para-fiscal charges to
streamline their use and further decrease
the administrative and regulatory burden
of companies.
effectiveness of measures In addition, the IMF’s preliminary
assessment concluded that the timely policy actions taken by
the government have an essential role in mitigating the
economic and social impact of the pandemic.
2) Partial implementation. Social protection activities
focused on countering the impact of COVID-19.. The
government implemented the guaranteed minimum assistance
(GMA) scheme. The new Law on Social Protection contained
‘activation’ measures to encourage recipients of the GMA to
get jobs. However those activations measures were only
partially implemented. The impact of changes in social
protection on the formalisation of jobs is not assessed.
3) Partial implementation. The Ministry of Economy
published on its website a list of 377 para-fiscal charges for
businesses, by competent authority, which were mapped based
on the catalogue of public services. Steps to reduce and
abolish these charges have yet to take place. The government
asked IPA funds to carry out a project in this area.
PG 6
Continue taking measures to preserve
employment including by ensuring
short-time work schemes and flexible
working arrangements.
Increase the capacity of and cooperation
between the Employment Agency and
Centres for Social Work to provide
integrated services and measures for
inclusion in the labour market including
training upskilling and reskilling.
Ensure adequate and sustainable funding
to strengthen the health care sector with
an aim to improve access to quality
public health care for all citizens.
There was substantial implementation of PG 6
1) Substantial implementation. According to labour market
figures, the economy showed some resilience due to the
measures taken to offset the consequences of the crisis
including by subsidizing wages and/or social contributions.
Additional income support was provided to people in
vulnerable situations and low-income people. The business
organisations are involved in the design of the measures.
2) Partial implementation. Cooperation between the
Employment Service Agency and the Centres for Social Work
has improved, but this cooperation should be further
strengthened and implemented in a systematic way. EU
financial support to the Employment Service Agency supports
measures to encourage unemployed people to find work.
However, the mentoring and psychosocial support services of
these measures have not yet been set up. Services to provide
training to the unemployed are currently being implemented.
3) Substantial implementation. The health sector was
prioritised by the government in 2020. This is reflected in
health expenditure. Health expenditure was 5.0% of GDP in
2019, but is estimated to have increased to 8.5% of GDP in
2020. It is planned to account for 5.8% of GDP in 2021, and
set to increase to 8.0% of GDP by 2060. The 2021-2025
public investment plan focuses on capital investments,
including in health. The plan also focuses on increasing wages
in the health sector to stem the decline in numbers of
specialised health workers. According to the World Bank,
social and health support was well targeted during the
pandemic. In the future, North Macedonia should give higher
priority to healthcare by appropriate allocation of staff and
money to the preventive policies and primary healthcare. This
can be achieved by introducing hospital procedures that
require shorter stays in hospitals, and by diminishing/ending
unnecessary referrals and hospitalisations.
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6. ASSESSMENT OF THE OTHER AREA/SECTOR AND STRUCTURAL REFORM MEASURES
INCLUDED IN THE 2020-2022 ERP
Business environment
Structural weaknesses in the business environment continue to be an obstacle for domestic
companies even though North Macedonia is ranked 17 out of 190 economies in the latest
World Bank Doing Business 2020 report. Informality and the quality of education of the work
force are among the top concerns reported by businesses (BEEPS VI, 2019). The absence of
civil servants from their posts, because of the pandemic has made the public administration
less responsive to businesses. There is a need to make the regulatory environment more
predictable, tackle widespread informality, streamline para-fiscal charges and improve the
efficiency of the workplace-inspection system. An effective and independent judicial system
is a prerequisite for creating an environment that is investment- and business-friendly.
Effective measures to further strengthen the rule of law, ensure adequate and timely contract
enforcement and decrease corruption could benefit the business environment and overall
competitiveness. There is also a need to further promote the skills needed to develop
innovation and entrepreneurship, support women’s entrepreneurship, simplify business
survival and bankruptcy procedures. It is also necessary to monitor the cost-effectiveness of
business-support schemes and ensure the coordination of different programmes. . Further
digitalisation in public administration in particular streamlining company registration and the
provisions of licenses and permits by consolidating the services under one-stop-shop could
help to ease doing business. The Public consultation about complex policies and laws relevant
for business operation were reduced due to the pandemic. These consultations will need to be
restored and intensified.
Measure 9: “E-marketplace for low-value procurement”
This measure is rolled over from last year. It aims to develop an online market-place for low-
value procurement and to professionalise civil servants working with public procurement.
This measure follows on from the new public procurement law, which has been in force since
April 2019. The law aims to harmonise the legal framework for public procurement with the
2014 EU Procurement Directives. It is expected that the measure will help to increase
transparency and predictability on the market by publishing public procurement plans
electronically and well in advance. The number of bidders per tender is also expected to rise,
in particular bids by SMEs. However, the potential effects of these developments have not
been sufficiently elaborated upon nor quantified. The risk identified for implementing the
measure is perceived as high, but no mitigating measures have been suggested. The financial
sustainability of the measure is not described. No budget is provided for 2022 and 2023.
Measure 10: “Streamline the use of para-fiscal charges”
This is a newly introduced and a very relevant measure, related to the policy guidance 5 of the
May 2020 Economic and Financial Dialogue between the EU and the Western Balkans and
Turkey. North Macedonia decided to use a phased approach in elimination of para-fiscal
charges. The measure envisages the assessment of 377 para-fiscal charges that were identified
in 2020, conducting further elimination, remodelling or streamlining, or proposing their
optimisation and digitalisation. The methodology for further rationalisation of para-fiscal
charges for SME’s is not elaborated and will be established after the 377 charges are screened
and optimised. The reason for such a reversed order is not elaborated though it could be
linked to swift reduction of some para-fiscal charges. North Macedonia’s chambers of
commerce have indicated that businesses do not necessarily object to para-fiscal charges but
would like to know what they are used for. Measure 10 could therefore also seek to clarify the
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rationale for these charges. The government could further elaborate on the impact these para-
fiscal charges have on competitiveness.
Measure 11: “Support start-ups and SMEs in selected less-developed regions of the
country to grow, produce added value and create a local living economy”
This is a newly introduced measure. It is very relevant and is linked to the key challenge of
competitiveness in domestic companies and the integration of domestic companies into global
value chains. The measure does not tackle regulatory issues related to the business
environment. Instead the measure is related to the implementation of a project that is funded
by the IPA and implemented by an external partner. This means that the implementation of
the action is not under the control of the government. To encourage businesses, the measure
should have included regulatory changes benefitting purpose-oriented start–ups and SMEs,
focusing on green-economy and women entrepreneurship. The part of the impact assessment
for this measure that deals with competitiveness is rather generic and should consider adding
quantitative information.
Measure 14: “Broadening the scope of digital services provided on National E-service
Portal”
This measure is also rolled over from the previous year and has been implemented for several
years. It is relevant for reducing costs and time spent in dealing with the administration . It is
therefore important for improving the overall business environment and the ease of doing
business. Although e-services for individuals have progressed, e-services for businesses have
not yet been sufficiently developed. There are currently127 services provided by
administrative bodies that are accessible online in the portal. However many business-related
services offered by individual institutions (such as the central register, the tax authority, the
agency dealing with land and property)are not yet linked to the portal. Of the 127 e-services
only 50 provide for fully electronic interactions, while more than 80 services merely redirect
to the web-site of the respective institutions, where the level of digitalisation of the service
depends on the IT development of the institution. The measure elaborates well on its purpose,
timeline, impacts, and on potential risks affecting its implementation. These risks stem from
the inefficient coordination and communication between state institutions, lack of IT human
resources and lack of commitment at operational level. Those risks could significantly
challenge the measure’s implementation and should be clearly monitored and counteracted by
mitigating actions. The indicators used to measure implementation of measure 14 are those set
in the IPA monitoring scheme. A large-scale, EU-funded project to upgrade the e-services
portal with 135 new services for companies and businesses started in August 2020.
Research, development and innovation (R&D&I)
North Macedonia’s average innovation performance remains below 50% of the EU average.
The European Innovation Scoreboard 2020 also assesses the country as a ‘modest innovator’.
Investment in research and innovation remains low at 0.36% of GDP. Private sector
participation is negligible but slightly improving at 0.1% of GDP. There is a need for closer
cooperation between academia and the private sector. The country performs poorly in public-
private co-publications, private co-funding of public R&D expenditures, design applications,
and sales of new-to-market and new-to-firm product innovations. The government’s support
for R&D&I in2020 was provided mainly through State-aid schemes implemented by the Fund
for Innovation and Technology Development. In particular, increased support was given to
research and innovation activities in initiatives linked to the response to COVID-19. The
impact of this financial support on private-sector R&D remains to be evaluated. It is also
important to ensure that the funding provided is distributed in a more transparent manner and
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accompanied by proper monitoring and an evaluation of the results. The country's annual
participation in the Horizon 2020 framework programme is increasing. However, North
Macedonia’s performance in the programme remains below its potential and the overall
success rate of 11.4% is below the average success rate of 15.8%. In 2012, the government
adopted an integrated research and innovation strategy covering the whole innovation value
chain from basic research to business innovation. However, this strategy now needs to be
updated. The smart-specialisation strategy, which is expected to replace an existing
competitiveness strategy, is still being developed.
Measure 13: “Enhancing cooperation between the academy and the industry”
This measure is rolled over from last year. It includes two sub-measures: (i) further
development of the science technology park (STP) and (ii) grants to increase cooperation
between academia and industry. The STP is planned to be a complex organisation offering
professional business support and innovation services to increase both innovation, and
networking possibilities at national level. The facility was formally established within the
State university in Skopje, and some funding was secured for its initial operation. However,
the government has not yet explained what specific fields of operation and specialisation the
STP will have. A balanced public-private structure for ownership and management, with
initial public funding, is a preferred model for operating a life-science park. However,
measure 13 does not mention whether potential private investors have been found. This
measure could benefit from activities going beyond the establishment of the STP, for example
encouraging industry to provide advice to universities on areas of research that would be
beneficial for certain sectors of the economy. Increased possibilities for private-sector funding
of research and innovation would also be beneficial.. Overall, there are no detailed plans on
activates under this measure.. The government has also not quantified the measure’s expected
impact on competitiveness, while the measure’s impact on employment and gender has been
insufficiently considered. Some activities on this measure should have already begun in 2020.
However, due to the pandemic, State resources were diverted to COVID-19 assistance
measures to private companies and the public. There is therefore a degree of uncertainty
whether the State budget will have funds to finance this measure in 2021. The government has
also not quantified the measure’s expected impact on competitiveness, while the measure’s
impact on employment and gender has been insufficiently considered. Some activities on this
measure should have already begun in 2020. However, due to the pandemic, State resources
were diverted to COVID-19 assistance measures to private companies and the public. There is
therefore a degree of uncertainty whether the State budget will have funds to finance this
measure in 2021.
Digital economy
The digitalisation of the economy has proven to be particularly relevant in the context of the
COVID-19 pandemic. The country’s Association for e-Commerce reported that the value of
online transactions made between the public and domestic online traders in the second quarter
of 2020 increased by 177% compared to the same period in the previous year. Further
digitalisation is still hampered by the relatively high cost of digital services and by the low
level of digital skills in the population. The share of the population with internet access
(mobile and fixed) in 2019 reached 83.65%. The National Broadband Competency Office was
set up according to the European model of gathering experts in the field tasked with an
advisory role to national and regional authorities on broadband investments in the country.
The national operational broadband plan aims to provide the measures to: (i) improve national
broadband connectivity; (ii) assess future public investments in broadband areas where there
is no commercial interest in providing broadband; and (iii) develop 5 G technology. In 2019,
the country adopted legislation to facilitate the use of electronic identification at national level
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and foster the use of e-signatures. E-signature is currently limited to a few institutions that
provide services to businesses, even though the equipment and software for e-signature has
been widely installed. However, the legal framework in electronic communications still needs
to be aligned with the EU acquis. The 2018-2022 national cybersecurity strategy addresses
the country’s challenges in cyberspace and fosters the development of a safe, secure, reliable
and resilient digital environment. However, further efforts are needed to address shortcomings
such as: (i) fragmented cybersecurity protection among institutions; (ii) inadequate
cooperation with the private sector; and (iii) the need to improve the legal framework. Digital
literacy is one of the education strategy’s priorities, while a specific strategy is being drawn
up to address digital skills. The government has organised campaigns to inform the public on
how to use e-services. An analysis across all of the country’s public institutions demonstrated
shortages of qualified ICT staff. This analysis recommended the development of policies to
retain existing ICT staff and attract new staff with the necessary ICT skills.
Economic integration performance
Before the negative impact of the COVID-19 crisis, the economy had a high and growing
degree of trade openness. The total value of trade in goods and services amounted to 132% of
GDP in 2019. In 2019, exports and imports grew by 10.3% and 9.6% respectively. Import
coverage by exports stood at 76.9% in 2020, with the merchandise-trade deficit amounting to
17.4% of GDP. Before the detrimental effect of COVID-19 on trade, the trade deficit had
been falling for several years, leading to a narrowing in the current account deficit and easing
the pressure on the exchange rate. The EU remains the country’s main trading partner. Before
the disruption caused by the COVID-19 crisis, total bilateral trade with the EU increased by a
further 8.9% between 2018 and 2019. In 2019, total bilateral trade with the EU exceeded
EUR 10.5 billion or 70.2% of total trade. In 2019, the country’s second largest partner was the
group made up of the CEFTA parties (10.1% of total bilateral trade in 2019). By country,
Germany, the United Kingdom, Serbia, Greece and Italy were North Macedonia’s biggest
trading partners in 2019. 95.6% of products from North Macedonia can access the EU market
without customs duties. The export product mix had been improving in years before the
COVID-19 pandemic. The share of iron, steel, and clothing in total exports remained stable
(17.4% in 2019, the same percentage as in 2018, although this has dropped from 33.3% in
2013). However, there was a further increase in the exports of chemicals, machinery and
transport equipment (this category accounted for 57.2% of exports in 2019 compared with
32.8% in 2013). The key import products are platinum and platinum alloys; petroleum oils;
other metals and alloys; and flat-rolled iron products. Exporting companies, notably SMEs,
still face key obstacles to trade. These impediments are due to non-tariff barriers, including
technical standards and administrative obstacles. The insufficient quality of logistics is an
impediment to further increases in exports. In 2018 the World Bank’s logistics performance
indicator ranked North Macedonia 81st out of 160 countries (World Bank, 2018). The
Economic and Investment Plan and deepening the regional integration of the common
regional market both have the potential to further increase trade and enable competitiveness
and growth.
Measure 15: “Trade facilitation”
This measure is continued from the previous year. It is relevant as it refers to the
implementation of CEFTA Additional Protocol 5 on trade facilitation. This additional
protocol includes a number of activities to simplify and speed up procedures conducted by
different agencies present at the border, in particular by improving the electronic exchange of
information. To this end, the countries of the CEFTA region are expected to continue using
the functionalities of the SEED+ system. The possible inclusion of Moldova in the system,
administered by CEFTA, will enable all CEFTA parties to be integrated and participate in the
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exchange of pre-arrival information on shipments. Activities to extend the concept of
authorised economic operators are continuing. These activities are also expected to reduce the
time spent on customs clearance and speed up the movement of goods across borders. The
ERP provides a good quantitative assessment of the expected impact of measure 15 on
competitiveness.
Measure 16: “Facilitating North Macedonia-Serbia cross-border crossing”
This measure is related to Measure 15, but it focuses specifically on setting up a joint rail
station on the border between North Macedonia and Serbia at the Tabanovce/Presevo
crossing. At present, checks by the relevant agencies (police, customs, veterinary agencies
and phytosanitary agencies) are carried out twice by the relevant services of the two countries.
The construction of the new joint facility will house the services of both countries in a single,
energy-efficient building. This will enable faster checks and joint conduct of the necessary
procedures, thus speeding up the flow of passengers and goods. It will also provide an
opportunity to carry out checks while the train is moving. The proposed timeline of 2021-
2023 for the proposed activities seems realistic. Nevertheless, the entire process is clearly
delayed, as the agreement to set up a joint border crossing between the two countries was
signed in 2015. The description of the measure indicates that it would increase the
competitive advantage of rail compared to road transport, although the description does not
quantify this increased competitive advantage. Savings created by the measure are expressed
only in time saved per train. The measure’s possible adverse effects on other means of
transport (notably road) are not considered. In addition, the possible benefits on the
environment from the reduced carbon footprint of rail transport compared to other means of
transport is not considered. The description includes a risk analysis and presents appropriate
mitigating actions.
Measure 17: “Strengthening the internal market in the Republic of North Macedonia”
This is a new measure in the ERP. It is relevant for the planned country reforms in the area of
internal market and further inclusion of the country in the European single market as indicated
by the Economic and Investment plan. The measure is expected to improve the country’s
position by harmonising its legislation with that of the EU in the area of free movement of
goods, free movement of services, and market surveillance. This measure is implemented with
the support of the IPA-funded project to strengthen market surveillance in 2021-2023. It
marks a significant start of reforms in this area after a long period of inactivity. The measure’s
expected impact on competitiveness and environment, which is only described in general
terms rather than with a clear focus on quantitative targets, could be improved further.
Energy
The economy is characterised by high energy intensity, inefficiencies in the ageing energy
production system, persistent high dependency on coal, and inefficient energy consumption.
These four characteristics of the economy all exacerbate air pollution. Domestic energy
production is dominated by fossil fuels. According to the latest available data, 39.43% of
gross energy consumption in 2019 was covered by domestic production, while 60.57% was
imported. On energy consumption, oil accounted for the largest share at 51.41%, followed by
electricity (27.58%), biomass (10.08%) and coal (5.98%). For final electricity consumption,
72.19% was covered by domestic production, while 27.81% was imported. Domestic
electricity production in 2019 relied heavily on lignite (41.95%), followed by hydropower
(16.86%), gas (10.81%), wind (1.48%), biogas (0.78%) and solar (0.33%). On infrastructure
investment, the country continues to construct several sections of gas pipeline. The 2018-2040
national energy strategy was adopted and it properly reflects the main challenges in the
energy sector. However, the national energy strategy should now be harmonised with the
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national climate strategy by taking into account the commitments under the Paris Agreement
on Climate Change. The government should also adopt a programme to implement the
energy-development strategy. North Macedonia should benefit from further regional
integration in energy and further liberalisation of the energy market. The country’s electricity
market is now open, and the regulation of wholesale and retail prices has ended. The overall
percentage of electricity consumption provided on the open market in 2019 was 49.13%. The
country has adopted the new balancing rules. In line with the Economic Investment Plan, the
Commission will support the development of renewable energy sources and less-polluting
energy sources that will secure energy supply in line with the commitments of the green
agenda for the Western Balkans.
Measure 1: “Increasing the competitiveness of the electricity market”
This measure is rolled over from the previous year. It aims to set up a more liquid and better-
organised electricity market to allow more competition in energy supply for the benefit of
customers. The measure will also stimulate cross-border regional-market integration and
connectivity. The measure can also be seen as part of the EU’s decarbonisation policies, the
Green Deal, and the Economic and Investment Plan. The measure could potentially have a
significant impact on the economy, as lower energy prices might make the country more
competitive. However, the potential impact – either on vulnerable households or on any
economic sectors – has not been quantified. The environmental impact assessment of the
measure should be strengthened. Significant potential risks related to the implementation of
the measure are sufficiently elaborated upon and should be clearly monitored. Other goals
should also be considered, such as the need to revitalise the old, electricity-producing
infrastructure.
Measure 2: “Promotion of renewable energy sources”
This measure is rolled over from last year, when it was presented together with a measure to
improve energy efficiency. It will help diversify energy generation, and improve the security
of energy supply. This is expected to benefit the economy by lowering electricity costs and
creating green jobs. The measure includes both regulatory aspects (including the adoption of
the law on biofuels) and activities to build power-generation capacity. The introduction of the
‘prosumer’ concept has not been adequately developed and lacks quantification. Following
the comments received from the Energy Community Secretariat on the draft national energy
and climate plans, the government should reconsider its schemes to support the deployment of
renewables. In particular, it should reconsider its schemes for small hydropower facilities, and
ensure that the incentives it provides do not favour specific renewable energy resources that
either do not require support or have disproportionate environmental impact. The description
of the measure does not discuss or quantify any impacts on competitiveness, social outcomes,
employment, or poverty reduction.
Measure 3: “Improvement of energy efficiency”
This measure is also rolled over from last year. However, unlike last year it is now presented
separately from the measure on promoting renewable energy sources. A refurbished and
improved building stock will help pave the way for a decarbonised and clean energy system.
This is because the buildings sector is one of the largest energy consumers, and is responsible
for a significant share of greenhouse-gas emissions and air pollution. Renovation of both
public and private buildings is an essential measure in this context, and has been singled out
in the European Green Deal as a key initiative to drive energy efficiency in the sector. The
description of the measure does not capitalise on the importance of the measure. The
environmental impact, which could be particularly relevant for this measure, was not
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sufficiently presented and lacks quantification. Impact assessments on economic and social
outcomes were also not sufficiently elaborated.
Transport
The transport market remains concentrated on road transport, with limited investment in other
means of transportation and with no consistent, intelligent system to manage and control
transport traffic. Road maintenance is handled by state companies that are not fully efficient,
operating with old equipment. In 2020, the transport sector’s contribution to gross value
added was 3.5%, which is lower than the EU average level of around 5%. The country’s
integrated road transport system is deemed to reduce travel time by 17% and road fatalities by
16.6%, benefiting trade flows and the economy (ERP, 2021). The World Economic Forum’s
2019 Global Competitiveness Report ranks the country 84th out of 138 economies for
transport infrastructure. Although better than some other peers, North Macedonia still
struggles with relatively low-quality transport infrastructure, as well as weak trade and
transport logistics. These problems present barriers for foreign companies wanting to invest in
the country. They also cause difficulties for domestic companies. The flagship policy of the
Economic and Investment Plan will be to further develop the Trans-European Transport
Railway Corridor VIII, directly linking North Macedonia, Albania and Bulgaria. This corridor
will give the country’s companies an alternative export option via Albanian and Bulgarian
ports. North Macedonia would also benefit from the opening up of the rail-transport market –
at least for domestic and regional firms. The fatality rate in traffic accidents is high at 32%
above the EU average. This is why the government is finalising the process to create a lead
road-safety agency to ensure a coordinated and comprehensive approach to road safety.
Measure 4: “Implementation of an Intelligent Transport System (ITS) along Corridor
X”
This measure is rolled over from the previous year. The ITS should be put in place along
Road Corridor X, which is a strategic objective of the 2018-2030 national transport strategy.
The ITS-related measures along Corridor X are currently being carried out without a specific
ITS strategy, although there are now plans to draw up an ITS strategy. The measure will help
to improve the safety of road transport and ease traffic flow along Corridor X. It is unclear
how the measures will influence travel time along the corridor, given that the main
bottlenecks are at border crossings and toll stations, the numbers of which have significantly
increased in recent years. The measure states that its expected economic impact is a reduction
in the time it takes to travel to border crossings, but the description of the measure should
further elaborate how ITS will directly influence this indicator. The measure’s full potential
impact on competitiveness and growth cannot be fully determined, given the description’s
insufficient analysis and its lack of any estimate for savings (in cost and time). Apart from
improving the measurement of greenhouse-gas emissions along the corridor, the possible
environmental impact of rolling out the ITS and having an ITS strategy in place has not been
analysed.
Agriculture
The agricultural sector is characterised by highly fragmented agricultural holdings that are
mostly privately owned (80%). It is also characterised by insufficient use of modern
technologies. In 2019, agriculture’s share of GDP dropped by 0.5 pps., and it now accounts
for nearly 8% of GDP. Employment in agriculture also declined in 2019 to 13.9% of total
employment (slightly higher than the EU average of about 10%). According to the latest farm-
structure survey (2016), an average agricultural holding in North Macedonia uses 1.8 ha of
agricultural area and breeds 2.1 LSUs (livestock units). The average farmer cultivated 1.5 ha
of land, which is less than 10% of the size of the average farm in the EU-28 (16.1 ha). The
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size of property holdings and their highly fragmented nature significantly curbs productivity,
as it prevents economies of scale and hampers investments in modernisation. Exports of agri-
food and fishery products account for 9.72% of total exports (EUR 624.5 million versus
EUR 6.42 billion in 2019). Imports of agri-food products in 2019 accounted for 9.89% of total
imports (EUR 837.15 million versus EUR 8.46 billion). Although the trade deficit in the agri-
food industry decreased by 13.8% in 2019 compared with 2018, the sector is still considered
to have weak competitiveness. Agricultural subsidies per hectare (estimated at between
EUR 340 and EUR 380) are above the EU average (estimated at below EUR 300 for the EU-
27). Subsidies remain linked to production, and are implemented via a very complex
administration scheme.. There needs to be a stronger link between agricultural policies and
other sectoral policies such as those on trade, education and SMEs. Several actions could be
taken to increase productivity through innovation and the application of modern technologies.
These actions include: (i) investing in the skills and know-how of agricultural workers; (ii)
strengthening the agriculture advisory services; and (iii) connecting agriculture with research,
education, and tourism.
Measure 5: “Improving the irrigation system”
The measure is rolled over from the previous year. It continues to target capital investments
in: (i) the construction of multipurpose dams; and (ii) the expansion of regional hydro
systems. This measure gives very little attention to investments in small-scale irrigation
systems. In addition, the ERP does not address actions addressing the regulatory framework
so as to improve the role of water users in managing small-scale irrigation schemes. The
measure also does not consider progress in adopting appropriate pricing methodologies, even
though this is crucial for the sustainability of investments in irrigation. The description of the
measure also fails to include information on: (i) the budget of the public water-management
company for maintaining the irrigation systems; and (ii) the revenues collected from irrigation
users. There is also a lack of information on the private investments made by farmers to make
irrigation technologies more environmentally friendly and reduce water use (e.g. drip-by-drip,
water wells, and boreholes). The description of the measure also does not mention synergies
with other structural measures such as agricultural cooperatives. The quantitative information
in the description referred to the construction of nine irrigation systems but these are not
mentioned in the narrative part of the description. The impact assessment is generic and does
not include sufficient quantitative information.
Measure 6: “Consolidation and defragmentation of agricultural land”
This measure, rolled over from last year, is still relevant as it aims to reduce the excessive
fragmentation of agricultural land by consolidating small parcels in larger units suitable for
modern and efficient agriculture. Abandoned and state-owned land should be considered
under the measure (it is not considered under the measure at present) and if needed
incorporated in the regulatory framework. The ERP contains quite specific information on: (i)
the land-consolidation areas which are undergoing land consolidation; and (ii) the planned
phases of land consolidation. Actions to incentivise voluntary land consolidation by groups of
farmers are still missing from the measure, even though voluntary land consolidation is
considered crucial for the sustainability and expansion of land consolidation. The description
of the measure contains budgeted estimates of capital investments involved in the process.
Risks are well identified in the measure, but no mitigation measures are mentioned. The role
of the municipalities has proven crucial to consolidate land. However, land-consolidation
processes remain deeply centralised, and some degree of decentralisation should be
considered to complement the mandate of municipalities planning the rural and urban spaces
in their territories.
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Measure 7: “Agricultural cooperatives”
The measure to support associations of farmers in agricultural cooperatives remains relevant,
as it addresses a key challenge faced by the agricultural sector due to the small size and
fragmentation of farms. This measure is rolled over from previous years but there has still
been only limited progress in its implementation despite the support provided through
national and IPA funds. The measure now takes into consideration the Commission
recommendation to link the measure to the alignment process with EU law on producer
groups and common market organisations. The government has now set up constructive
cooperation between the activities under this measure and the activities supporting the
Common Market Organisation in North Macedonia. Although progress was made in
preparing the relevant legal framework, there has been a serious delay in adopting both the
Law on Agriculture and Rural Development and the relevant secondary legislation. The
reform is consistent with other related measures in the ERP, but expectations are low that
young farmers – and young female farmers in particular – will become involved in the coming
years. This is mainly due to the lack of motivation among farmers to be part of a cooperative.
There should be a more active national campaign to increase farmers’ interest in agricultural
cooperatives. The expected impact of this measure on competitiveness, employment and
gender needs to be considered more, and the impact of the measure could be further
quantified.
Measure 8: “Farm road (re)construction”
This measure is new. The description of the measure should have explained in more detail the
specific impact of rural roads on overall agricultural development. The impacts of road
construction in rural areas may be positive in increasing market-prices for farm produce,
increasing the size of farms, and encouraging greater adoption of modern farming techniques.
Given the lacking impact assessment, it is unclear whether this measure is to be considered as
an economic reform for the agriculture sector or if it has social relevance to improve quality
of life in rural areas. The description of the measure should elaborate further on the
prioritisation of the measure’s locations. More clarity is needed on who is responsible for
implementation, and further explanation is needed on how the relevant ministries will be
involved at the different stages of the works.
Industry
The main obstacles to competitiveness in North Macedonia’s industry include: (i) low
productivity and the slow growth rate of productivity; (ii) limited modernisation of production
processes and obsolete technologies caused by insufficient public and private spending on
research and innovation; (iii) insufficient development of clusters of businesses; and (iv) a
significant skills gap. The industrial sector contributed 24.6% of the economy’s gross value
added and 30% of jobs in 2019. In 2019, industry’s share of higher-value-added manufactured
goods (machinery and equipment, chemical products) rose at the expense of basic goods (iron,
steel and clothing). This was mainly due to the activities of foreign companies. Nevertheless,
in 2019, domestic companies in these sectors contributed an increasing share to total exports.
The level of cooperation between universities and the industrial sector remains very low. Low
levels of skill among workers also hinder productivity: the average manufacturing and
services worker is on average only 25% as productive as their counterpart elsewhere in
Europe and central Asia (World Bank, 2018). Linkages between domestic industry and
international production chains remain insufficient. However, like elsewhere in the world, the
transition towards a greener economy brings significant potential in the local market for low-
emission technologies and sustainable products. This offers great potential for new activities
and jobs in North Macedonia. The Economic and Investment Plan has productive investments
based on circular-economy principles. This plan could significantly foster sustainable
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production and consumption in North Macedonia’s industry. Given the importance of
manufacturing to the composition of GDP and jobs, additional reform measures in this area
should be considered.
Services
According to the latest available data, the services sector accounted for 54% of the country’s
total employment and 54.06% of its GDP in 2019. The further development of companies in
the services sector is hampered by weak entrepreneurial skills and a significant skills gap
among employees, particularly in soft skills. Despite the increase in exports of services, they
represent only around 26% of the value of the country’s export basket, indicating the low
competitiveness of companies in this sector. Tourism and transport continue to account for the
largest chunk of the country’s services exports (40% of services exports) followed by services
provided by manufacturing companies (25% of services exports). Services provided by
manufacturing companies have significant potential for growth because their development is
closely related to the inflow of export-oriented FDI. Close to 25% of service exports are made
up of exports in: (i) telecommunications services; (ii) computer, and other information
services; and (iii) other business services. There is room for these categories of service
exports to grow further.
Education and skills
This sector and the relevant reform measure (Measure 18) are analysed above in Section 4
under key challenge #1.
Employment and the labour market
This sector is analysed above in Section 4 under key challenge #1.
Social dialogue
Social dialogue in the private sector between employers and trade unions remains weak. The
commitment of trade unions and employers to strengthen collective agreements also remains
weak. The absence of trade-union activities means that few businesses have collective
agreements at the company or branch level. Most members of trade unions are in the public
sector. The Economic and Social Council (ESC) is actively involved in drawing up relevant
legislation before its adoption, but this is limited to legislation drawn up by the Ministry of
Labour and Social Policy. The tripartite ESC of North Macedonia (which includes
representatives of employers, trade unions and the government) needs to increase its visibility
and impact. On funding, the ESC depends on the budget of the Ministry of Labour and Social
Policy to finance its activities and secretariat. At the local level, despite some progress in
raising awareness on the benefits of social dialogue, the use of the local economic and social
councils as an effective tool for formulation and implementation of local employment policies
is still very limited.
Social protection and inclusion
The at-risk-of-poverty-after-social-transfers rate stood at 21.9% in 2019 and the Gini
coefficient (30.8%) fell compared to previous years. Social transfers, particularly pensions,
are very important for keeping people out of poverty. The implementation of the Law for
Social Protection, the amended Law for Child Protection, and the Law for Social Security for
the Elderly have helped increase social-protection coverage among vulnerable people,
especially among households with children. The newly introduced social rights (i.e. the
educational allowance, the social pension, and the increased GMA) were expected to reduce
Page 40 of 48
the at-risk-of-poverty rate in the country but the effects of these newly introduced rights are
not yet clearly visible. In addition, the COVID-19 pandemic has further damaged overall
employment prospects in the country, and this will undermine attempts to assess the effects of
the reform of the social-protection system.
The process of decentralising social services is still in its initial stage. Although the Law on
Social Protection strengthens the powers of the social services, municipalities still do not take
sufficient responsibility to carry out their social functions by designing and adopting their
own social-protection programmes. Municipalities should improve coordination between the
public employment service and other services such as social-work centres, social-service
providers, and the health sector. This is another prerequisite for the success of the social
reforms package. The social impact of the COVID-19 pandemic has been made less severe by
enabling access to GMA for people whose employment ended during the pandemic. This
covered more than 3 500 households in 2020. Due to universal health coverage, very few
people in North Macedonia report an unmet need for medical care (2.5% in 2019).
Measure 19: “Strengthening the system for social inclusion of the vulnerable categories
of people”
Measure 19 provides better-targeted cash transfers and increases the effectiveness of these
cash transfers. It also improves the connection between: (i) cash transfers; (ii) measures for
‘activation’ on the labour market; and (iii) the social services. This measure is considered
crucial for tackling poverty in the country, and is rolled over from the previous year with
some changes. The new Law on Social Protection was adopted in 2019 with accompanying
bylaws providing the comprehensive legislative framework for social protection in North
Macedonia. The bodies that are responsible for implementing, monitoring and enforcing the
law should increase their staff numbers and the skill levels of their staff. A system for
licensing social services is currently under development. This system will ensure that each
provider meets the prescribed standards and requirements for the relevant social service. The
measure contains a relevant information campaign, including fieldwork targeting potential
beneficiaries, particularly the people in vulnerable situations (Roma and women with
children). Increased cooperation between the public employment service and the centres for
social work is indispensable for fostering the support and labour activation of employable
GMA beneficiaries.
Measure 20: “Strengthening the quality of primary healthcare”
The main goal of this measure is to improve the quality of primary healthcare (PHC) by: (i)
reforming the PHC payment model to promote sickness prevention; (ii) drawing up standards;
and (iii) reducing use of higher levels of healthcare. The measure contains plans to develop a
platform to facilitate appointments and ensure the traceability of health data. On the
availability of healthcare, North Macedonia has a well-dispersed network of primary
healthcare at the municipal level. Despite 90.3% coverage by health insurance in 2016, data
from the EU Statistics on Income and Living Conditions (EU-SILC) show that 20.5% of
people in the country have difficulty using healthcare services. This figure is close to the
official number of people at risk of poverty, suggesting that most of those who have difficulty
in accessing healthcare may also be at risk of poverty. As indicated in the report by the
European Social Policy Network on inequalities in access to healthcare in North Macedonia
(Gerovska Mitev, 2018), the main weaknesses were in the accessibility and affordability of
the healthcare system including: (i) a lack of integration of unregistered/undocumented people
within health insurance and healthcare (mostly affecting Roma people); (ii) the difficulty of
using healthcare experienced by specific households and income groups (such as households
Page 41 of 48
with three or more dependent children, single persons with dependent children, and
households with income below 60% of the median equalised income); and (iii) a high share of
out-of-pocket payments (mostly private and informal) that increase the overall health
expenditure of households.
Page 42 of 48
ANNEX A: OVERVIEW OF THE MAIN INDICATORS PER AREA/SECTOR OF THE ECONOMY
Area/Sector 2016 2017 2018 2019
EU-27
Average (2019 or most recent
year Energy
Energy imports
dependency (%)
58.95% 56.45% 56.68% N/A 60.62%
Energy intensity:
Kilograms of oil
equivalent (KGOE) per
thousand Euro
N/A 291.58 265.46
288.99 112.92
Share of renewable energy
sources (RES) in final
energy consumption (%)
18.04% 19.63% 18.18% 16.81% 19.73%
Transport
Railway Network Density
(meters of line per km2 of
land area)
26.85 w 26.85 w 26.85 w 26.85 w 49.0 (2018)
Motorization rate
(Passenger cars per 1000
inhabitants)
190 194 200 205 519 (2018)
Agriculture
Share of gross value added
(Agriculture, Forestry and
Fishing)
10.6% 9.1% 9.8% 9.3% 1.8%
Share of employment
(Agriculture, Forestry and
Fishing)
16.2% 16.2% 15.7% 13.9% 4.3%
Utilised agricultural area
(% of total land area)
49.8% 49.7% w 49.7% w 49.7% w 40.0%
(2017, EU-28)
Industry
Share of gross value added
(except construction)
19.7% 20.5% 21.5% 20.7% 19.7%
Contribution to
employment (% of total
employment)
23.1% 23.3% 23.9% 24.1% 18.1%
Services
Share of gross value added
61.7% 62.9% 62.5% 63.6% 73.0%
Contribution to
employment (% of total
employment)
53.1% 53.2% 52.9% 55.0% 70.8%
Page 43 of 48
Business Environment
Rank in WB Doing
Business
(Source: World Bank)
16 10 11 10 N/A
Rank in Global
Competitiveness Index
(Source: World Economic
Forum)
63 60 84 82 N/A
Estimated share of
informal economy in GDP
(as % of GDP) (Source:
IMF)
Up to 37.6% N/A N/A N/A N/A
Research, Development and Innovation
R&D intensity of GDP
(R&D expenditure as % of
GDP)
0.44% 0.35% 0.36% 0.37% 2,2%
R&D expenditure – EUR
per inhabitant
20.30€ 17.20€ 18.8€ 19.9€ 688.6€
Digital Economy
Percentage of households
who have internet access
at home
75% 74% 79% 82% 86% (2018)
Share of total population
using internet in the three
months prior to the survey
[NB: population 16-74] 72% 75% 79% 81% 85% (2018)
Trade
Export of goods and
services (as % of GDP) 50.7% 55.1% 60.4% 62.3% 49.4%
Import of goods and
services (as % of GDP) 65.5% 69.0% 72.8 % 76.5% 45.7%
Trade balance (as % of
GDP) -18.5 % -18.1% -16.8% -18.2% N/A
Page 44 of 48
w: data supplied by and under the responsibility of the national statistical authority and published on an "as is"
basis and without any assurance as regards their quality and adherence to EU statistical methodology’
Source of data in Annex A: EUROSTAT, unless otherwise indicated.
Education and Skills
Early leavers from
education and training (%
of population aged 18-24)
9.9% 8.5% 7.1% 7.1% 10.2 %
Youth NEET (% of
population aged 15-24)
24.3% 24.9% 24.1% 18.1% 10.1 %
Formal child care -
children aged less than 3
years (% of total)
9.1% 10.3% 8.8% 13.0% 35.3 %
Individuals’ level of
digital skills (% of
individuals aged 16-74
who have basic or above
basic overall digital skills
by sex)
34% 32% N/A 32% 56%
Employment
Employment Rate (% of
population aged 20-64)
53.3% 54.8% 56.1% 59.2% 73.1%
Unemployment rate (% of
labour force aged 15-74)
23.7% 22.4% 20.8% 17.3% 6.7%
Gender employment gap
(Percentage points
difference between the
employment rates of men
and women aged 20-64)
21.2 pps. 21.9 pps. 21.4 pps. 21.3 pps. 11.7 pps.
Social Protection System
% of population at risk of
poverty or social exclusion
41.1% 41.6% 41.1% 39.9% 20.9%
Impact of social transfers
(Other than pensions) on
poverty reduction
14.79% 14.29% 14.79% 14.96% 32.380%
Self-reported unmet need
for medical care (of people
over 16)
2.9% 2.5% 2.3% 2.5% 1.7%
Income quintile share ratio
S80/S20 for disposable
income by sex and age
group (Comparison ratio
of total income received
by the 20% with the
highest income to that
received by the 20% with
the lowest income)
6.63 6.38 6.16 5.56 4.99
Page 45 of 48
ANNEX B: PROGRESS WITH STRUCTURAL REFORM MEASURES FROM 2019-2021 ERP
While tackling immediate impact of COVID-19 pandemic has been a clear priority in 2020,
some progress was made in implementing the measures from last year’s ERP (average score:
2.21 out of 5). Activity reports provide a mostly accurate description of the level of
implementation. The scoring is slightly imprecise for the measures related to agricultural
development and social sector. Implementation is stronger for some measures, such as
measure 15 on Youth Guarantee and on measure 7 on increasing competitiveness in tourism
sector. In contrast, implementation is weaker for other measures, such as measure 12 and 13
related to trade where the implementation is very limited. Implementation of the measure
focused at reducing the informal economy has also been limited.
6%
38%
31%
19%
6%
0%0%
5%
10%
15%
20%
25%
30%
35%
40%
noimplementation
implementation isbeing prepared
initial steps havebeen taken
implementationongoing with
some initial results
implementation isadvanced
fullimplementation
Implementation of the structural reform measures of the ERP 2020-2022
no implementation implementation is being prepared
initial steps have been taken implementation ongoing with some initial results
implementation is advanced full implementation
Page 46 of 48
ANNEX C: COMPLIANCE WITH PROGRAMME REQUIREMENTS
The government of North Macedonia submitted the 2021-2023 ERP on 29 January 2021.
None of its components are missing.
Inter-ministerial coordination
The Ministry of Finance of North Macedonia coordinated the preparation of the ERP and an
inter-ministerial working group comprised of several ministries, agencies and other offices
were involved in this work. The submitted ERP contains the annex with the list of institutions
and individuals involved in the ERP preparation. Upon completion, the government formally
endorsed the ERP on 26 January. The coordination process worked well and the attendance to
technical meetings was good. On 21 January, Minister of Finance, other relevant ministers
and heads on institutions presented the reform measures included in the final version of the
2021- 2023 Economic Reform Programme to the EU Ambassador.
Stakeholder consultation
The draft of the 2021-2023 ERP’s structural reforms was posted on the Ministry of Finance's
website for 15 days before 21 January. Interested parties were also invited to send written
contributions. On 15 January 2021, the draft 2021-2023 ERP was discussed in a session of the
Economic and Social Council. Comments and suggestions received in writing are attached as
an annex to the ERP.
Macroeconomic framework
The macroeconomic framework is coherent and consistent, while somewhat optimistic. The
ERP presents two alternative scenarios compared to the baseline: (i) assuming lower growth
in trade partner countries; and (ii) assuming lower investment. It does not include a low-
growth scenario combining both domestic and external risks. The ERP’s sensitivity analysis
would have benefited from a more comprehensive impact assessment, including on
employment, deficit and debt. The external sector outlook is described in detail and an
analysis of external debt sustainability is provided in the annex. The latter could have been
improved by providing more detail on parameters and on the results of the stress test.
Fiscal framework
The ERP is based on the latest budget projections following the latest budget revision and on
the fiscal data available at the end of the third quarter of 2020. In line with the revised
economic growth assumptions, the ERP has raised the deficit projections, compared to
previous year’s program. It includes: (i) information on the expected budgetary impact of new
policy measures; (ii) an analysis of the budget balance's sensitivity to lower GDP, lower
revenue, and higher expenditure growth; (iii) an analysis of public debt's sensitivity to
changes in interest rates and exchange rates; and (iv) a short assessment of the long-term
sustainability of public finances based on a number of assumptions, including population
ageing. The external debt analysis refers to stress tests for shocks to the primary current
account and to economic growth. These stress tests would have benefited from more detail on
the impact of individual debt-creating flows and from alternative scenarios.
Structural reforms
The chapter on structural reforms follows the ERP guidance note. More efforts are needed to
quantify the impact for each measure and turn the ERP into a more policy relevant document
to guide economic reforms. The description of the implementation risks and mitigation
measures has improved. The ERP includes 20 measures and exceeds the page limit. The
government has not included any measure on the industry and services sectors though it is a
very relevant component in terms of share of GDP and employment, however it has included
Page 47 of 48
the analysis of these sectors. The measure on strengthening the quality of primary health care
is also prioritised reflecting the emerging needs of COVID-19 pandemic. Tables 9-11 in the
annex are properly completed. The implementation reports of the 2020-2022 ERP's policy
guidance and Table 11 in annex are well prepared. The scores attributed mostly reflect the
implementation level. Contributions received during the consultation process with external
stakeholders were annexed to the document.
Page 48 of 48
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